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Sweet mEVs strike no fear in Indian refiners’ heartelody of distressed assets

The story

Indian refiners plan to add 193 million metric tonnes, or 80% over their current capacity by 2030. At a time when the world is busy predicting the end of the oil age, this feels astounding.

What really is the plan?

All the state-owned and private refiners are planning expansion. Indian Oil plans to add the maximum 36 million tonnes, and Reliance Industries plans to add the second-highest 30 million tonnes. After the expansion, Indian Oil will remain India’s largest refiner, and Reliance the second-largest, as they are now.

So, what is the worry?

Dozens of billions of dollars will be needed for this expansion. Electric vehicles barely count in the current fleet of on-road vehicles but the fear is that if a rapidly building wave of EVs was to sweep the globe in a decade or so, the new refining capacities could lay stranded. This could mean deep trouble for both oil companies and their financiers.

Don’t refiners know this?

Of course, they do. But they are clearly betting EVs will take several decades before capturing the mass market. “It is nice to talk about EVs as long as you know for sure that petrol pumps round the corner have enough supplies for your car,” the chairman of a large Indian refiner recently told me, illustrating how EVs are mere talk and oil is a necessity society can’t live without. By and large, this captures the feeling at almost all Indian oil companies – most of them would offer brave words but do little else to transition into the possible EV age. Strong domestic oil demand year after year has further blinded Indian firms into believing good times are here to stay.

Are Indians alone in taking such a bet?

Not really. Some of the largest global oil firms believe EVs are a long distance away. They could be right given that electric cars and its key component, battery, are still very expensive compared to petrol or diesel driven cars – although costs are falling sharply. The economies of scale that would come with increased demand would further cut prices but to make batteries affordable, some tech breakthrough is needed. In addition, the charging infrastructure is a big bottleneck today. But big policy support for EVs in some of the key markets, in developed world as well as in China although not so much in India, are already helping EVs sell far more than forecast year after year. But most oil companies are still scared to predict their death while accepting it’s on way.

Refiners are clearly betting EVs will take several decades before capturing the mass market.

How serious is Indian refining expansion plan?

Refineries take years to build. For the existing plants, expansion is more about allocating capital and procuring equipment, and is therefore faster. But new plants require land, acquiring which can quickly transform into a never-ending process fraught with political risks. Still, much of the expansion plans could fructify but some would surely be lost on the way.

So, some expansion plan may stay just on paper?

Very likely. Some of the proposals one sees in the table above are probably never intended to be built. They are probably there just to serve as deterrent for rivals – it’s standard business practice for a company with no intention of adding capacity to announce expansion plans, hoping the fear of a possible supply glut will hold back others from expanding. In the end, there is less capacity than the industry could have needed, leaving every player with better profit margin.

Second, in the next few years if the wave of EVs starts looking more real, or the demand for oil peaks, companies could shelve some plans since the expansion is proposed over several years.

What if EVs still happen much faster than believed by oil companies?

If EVs succeed, the demand for petrol and diesel will fall dramatically. In that case, Indian refiners are hoping they will switch to making petrochemicals, mainly used to manufacture plastic the use of which is rapidly rising in almost every industry. But when all the refiners around the globe try the same trick, a glut could make the business little attractive. Also, pressure from green activists who detest plastic since it’s non-biodegradable could check its flyaway use. So, expect refineries to spew a lot of bad news if EVs were to really take off.