Demand growth in petrol and diesel combined will likely decline to 1.5% per annum this decade, compared with 4.9% in the last, because of increasing blending of ethanol with petrol, and rising usage of vehicles powered by compressed natural gas (CNG) and electricity (EVs). The trend will also be persuaded by policy interventions as India targets net zero emissions by 2070.

Taking cue, oil refiners would be altering their production mix in favour of alternatives such as petrochemicals, which should also support their profitability.

Says Hetal Gandhi, Director, CRISIL Research, “A more than three-fold increase in the number of CNG stations, advancing of the ethanol blending target, and a significant decline in EV battery prices are likely to slash demand growth in petrol to ~1% this decade from 8.4% in the last. Demand for diesel will be relatively resilient (2% annual growth compared with 3.9% earlier) because of non-exposure to the two-wheeler segment, where the shift to EVs is sharper, and the presence of a significant proportion of freight vehicles where CNG and EV penetration would be limited. Consequently, the proportion of diesel and petrol in the consumption of petroleum products will reduce to ~44% by 2030 from ~50% now.”

Yet refiners are expected to add ~37 million metric tonne per annum of capacity (~15% over the existing base) by fiscal 2025, investing over Rs 1.5 lakh crore. Almost all these facilities would be capable of producing both, transportation fuel and petrochemicals.

Consumption of petrochemicals is expected to grow at a healthy 8-10% in India. Per-capita consumption of polymers is expected to double to 18-20 kg by fiscal 2030. That, and slowing demand for transportation fuel would result in the share of petrochemicals in petroleum products rising to 17% by fiscal 2030 from 7% in fiscal 2020. This healthy demand growth for petrochemicals will partly offset the decline in India’s crude oil demand growth to 3.5% this decade from 4.5% in the last.

This flexibility of diversification would lend stability to refiner margins. Their profitability, and those of oil marketing companies (OMCs) has been on the mend with margins gradually rebounding to pre-pandemic levels.

Says Nitesh Jain, Director, CRISIL Ratings Ltd, “Most refineries in India are configured to produce more of diesel and petrol (~57%) and less of petrochemicals (12-15%). Typically, their production flexibility is limited within light, medium and heavy distillates. But the upcoming, integrated facilities — or crude-to-chemicals complexes — could produce relatively more petrochemicals. Despite the higher capex required for such facilities, interest coverage and gearing are expected at 5 times and below 1.5 times, respectively, over the medium term, because of better optimisation of output to maximise overall profitability.”

Despite the lower demand growth for petrol and diesel, the credit profiles of refiners and OMCs will remain stable over the near-to-medium term, indicates a CRISIL Ratings analysis of public sector refineries and OMCs, which have 65% share of refining capacity and 90% share of oil marketing in India¹.

Our ratings on most refiners and OMCs factor in support from the government, which is their majority owner, as well as the sector’s criticality to the economy.

CRISIL Ratings sees limited downside risk for the eight companies from the sector that it rates. Any significant change in policies or regulations remains a monitorable.

¹ Private refiners predominantly caters to the export markets and, thus, were not included in this assessment