India’s crude imports may remain high as domestic output struggles to catch up with rising demand: Experts

India’s dependence on import of crude oil soared to record-high of 87 percent in FY23.

India’s dependence on imported crude oil went up from 85.5 percent of its total consumption in 2021-22 to a record high of 87.3 percent in 2022-23, amid rising fuel demand in the country and lacklustre domestic production.

While India aims to reduce this dependence on imports, in the short to medium term it may have to resort to more imports as demand continues to be strong amid a decline in domestic production, sector experts said.

According to data from the Petroleum Planning & Analysis Cell (PPAC), India’s import of crude oil has gone up from 85.5 percent in 2021-22 to 87.3 percent in 2022-23.

“The gap between fuel demand and domestic oil production will increase. Therefore, India should try to increase its domestic production as fast as it can. Otherwise, it will be a big issue,” said Harshavardhan Dole, Vice President, IIFL Securities.

The decline in domestic crude oil production from operational assets has hurt overall local supplies even as exploration and production activity remains slow, analysts said.

Why domestic production is down?

Energy experts told Moneycontrol that the muted crude oil production in India is on account of no new big oil discoveries and a decline in production from existing resources.

According to government data, domestic crude oil production in March 2023 fell 2.8 percent. Oil India Limited (OIL) registered growth of 7.2 percent while Oil and Natural Gas Corporation (ONGC) posted a contraction of 1.5 percent in March 2023 as compared to March 2022.

“India does not have enough oil and gas reserves. Our (oil) demand is rising every year, by 3-4 percent, while production has been stagnant, in fact, declining,” said Dayanand Mittal, Research Analyst, JM Financial Institutional Securities Ltd. “Most of the major discoveries in India happened in 1970 and early 2000s and there has been no major discovery since the last 20-30 years. So, gradually all our incremental demand is being met by imports.”

ONGC, India’s largest oil and gas explorer, has been posting a decline in domestic production since the last 2-3 years. The state-run oil giant, however, expects the trend to reverse in 2023 with the commission of oil production from its delayed Krishna Godavari basin KG-D5 project.

“Every oil field goes through a natural decline in output after some years. ONGC faces the problem of a natural decline in its old fields, which will be compensated by new production (from the KG basin). After adjusting that, we will get ONGC’s output volume. But, overall, we will have to depend on imports of crude oil,” said Avishek Datta, Research Analyst at brokerage Prabhudas Lilladher.

Oil production from ONGC’s KG-D5 project was anticipated to begin from March 2020. However, the company missed deadlines. ONGC blamed the coronavirus restrictions, engineering changes and project execution challenges for the delay. It now expects oil production at KG-D5 to begin in May, with a peak oil output of 45,000 barrels per day (bpd).

New exploration and production

With the aim of increasing domestic production, the Indian government has opened new areas for exploration activities in the country.

Till now, the government has conducted seven Open Acreage Licensing Policy (OALP) rounds and awarded 134 exploration and production blocks covering over 2,07,691 square kilometres across 19 sedimentary basins.

The sedimentary basins or blocks offered in the bids have mostly been awarded to state-run public sector undertakings (PSUs) because of muted participation by private and foreign players. Despite several calls by the government, private oil companies have been hesitant to bid for the blocks.

“Energy is a strategic requirement. Suppose somebody cuts off your supply, what will you do? That's why any country, which is a large consumer, also needs a strategic reserve. That’s why we are also talking in terms of increasing the size of our strategic reserve,” Union Minister for Petroleum and Natural Gas Hardeep Singh Puri had told Moneycontrol in February.

Rising fuel demand

India's fuel demand is seen growing 4.7% in the next fiscal year (2024-25), as per initial government estimates.

According to a report by the Organization of Petroleum Exporting Countries (OPEC), India’s demand for refined oil products is also expected to remain strong in 2023.

Oil demand will be driven by air travel recovery, and supported by healthy mobility and steady industrial activity, the oil cartel said in the report.

Dole said that there is a need to push E&P activity as the development of an oil block takes a few years. He added that it is very difficult to extract oil from deep waters and efforts taken by the government will only show results after a few years.

Government data showed that India consumed 222.30 million tonnes of petroleum products in 2022-23, an increase of 10.2 percent year-on-year.

The increase in consumption of petroleum products, an indicator of crude oil demand, was led by 13.4 percent growth in petrol, 12 percent in diesel, and 47 percent in aviation turbine fuel.

Impact on the economy

The surge in imports of crude oil means bigger import bills.

India, currently, enjoys discounts on import of crude oil from Russia as the latter is diverting its supply away from Europe.

Russia is now supplying the majority of its crude oil to Asian countries, especially India and China, at discounted rates after the European Union (EU) and the US imposed a slew of sanctions on Moscow.

Moneycontrol had reported in December 2022 that India is estimated to have saved over Rs 35,000 crore by importing cheap Russian crude since February 2022, when Russia sent troops into Ukraine.

Prior to the war, Indian refiners did not use much Russian crude due to the high logistics cost. The higher level of imports from Russia is expected to last till the war is on or until Russia decides to withdraw the discounts. Banking on discounted crude cannot be a long-term strategy and the country needs to scale up domestic production for energy security, experts said.

In its 2023 outlook, Refinitiv Oil Research wrote, “The conflict (Russia-Ukraine) will continue to play a significant role in the energy markets in 2023, with no signs of any deescalation seen between the two sides that are bent on achieving their stated objectives. The conflict devastated the world's economy, led to death and destruction in Ukraine, but it is a bullish factor for the energy markets.”

On April 21, Indian energy major Reliance Industries Ltd cautioned that the recent surprise oil production cut announced by OPEC and its allies, known as OPEC+, might impact demand if prices remain high.​