OMCs bet billions on petchem amid rising risk, market shifts

The combined capex of the top 10 public sector oil and gas companies has more than tripled, rising from an annual average of Rs 34,000 crore during FY05-09 to Rs 1.1 lakh crore in FY19-24, according to a July report from Kotak Institutional Securities.

India's top refiners —Indian Oil Corp Ltd (IOCL), Hindustan Petroleum Corp. Ltd (HPCL), Bharat Petroleum Corp. Ltd (BPCL), and Oil and Natural Gas Corp. (ONGC)—are investing billions to dominate the petrochemical sector as demand for traditional fuels declines amid the shift to clean energy.

Success will depend on whether the refiners can achieve their ambitious goals and emerge as industry leaders. Investors will closely watch if their aggressive capex translates into sustainable, long-term returns.

Surge in capex: a double-edged sword

The combined capex of the top 10 public sector oil and gas companies has more than tripled, rising from an annual average of Rs 34,000 crore during FY05-09 to Rs 1.1 lakh crore in FY19-24, according to a July report from Kotak Institutional Securities. This surge in spending is driven by aggressive expansion in refining and diversification into new sectors, such as new energy technologies.

IOCL, the second largest player in the domestic petrochemicals market after Reliance Industries, has earmarked Rs 61,000 crore for its Paradip petrochemicals complex, and plans to produce niche offerings like specialty chemicals and biopolymers.

BPCL has earmarked a whopping Rs 75,000 crore for petchem projects, and plans to have additional integrated refining and petrochemical capacities within the next five-seven years. ONGC Petro-additions Ltd's cumulative investment in the sector stands at Rs 22,728 crore, while HPCL has flagged 'large scale investments' in its annual report without disclosing any figure.

The investments come at a time when the industry is hit by weak global demand, and increased competition from new refineries entering the market.

"For the OMCs, the returns would be lower since 1 million tonnes of petrochemicals require around Rs 20,000 crore of capex, hardly translating into an EBITDA of Rs 2,000 crore. But these companies will source the raw material in-house, hence it would be cheaper, also they will do the marketing, so it will be manageable for them," said Gagan Dixit, an analyst at Elara Securities.

While the petrochemical sector offers growth potential, the historical performance of PSUs in this area has been less than stellar, adding a layer of risk to these ventures, notes analyst Anil Sharma of Kotak Institutional Securities.

"The track record of most Indian players, particularly oil PSUs, has been very weak. In our view, compared to the upstream, refining, and gas value chain, petrochemical plants are far more complicated. Indian PSUs have historically struggled in the petrochemicals business, and their profitability has been weak too," Sharma wrote in his research report.

The petchem push: a strategic necessity

For OMCs, the move into petrochemicals is not just an option but a strategic necessity. As the world moves towards decarbonisation, the demand for traditional fossil fuels is expected to plateau and eventually decline. In contrast, the petrochemical sector, which produces essential materials like plastics, fertilisers, and synthetic rubber, is expected to grow significantly, driven by rising demand from industries such as automotive, construction, and consumer goods.

HPCL anticipates an opportunity to establish itself as a leading polymer brand in the market through the pre-marketing of polymers prior to the commissioning of the refinery and petrochemical complex. Polymers are typically used in plastic bottles, packaging materials, medical devices, and even in some household cleaners.

Meanwhile, BPCL expects demand for major petrochemical products to rise by 7-8 percent annually. "BPCL has identified petrochemicals as one of its strategic levers for future expansion," the company said in its annual report last month.

IOCL said the company’s research and development department is working on making its refinery operations agile by leveraging technologies that enable the diversion of road transport fuels for petrochemical production, including niche grades such as speciality chemicals, industrial/ intermediate chemicals, and biopolymers.

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