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Friday 3 August 2012

India's energy shortage


India sucks in diesel as poor monsoon triggers massive power shortage


2 August, 2012

A day after two massive power blackouts crippled northern India, state-owned refiner and largest marketer Indian Oil Corp. sought its fourth parcel of gasoil for this summer -- it needs 60,000 mt (507,000 barrels) of gasoil for August 19-21 delivery (see story at 0411 GMT).

And market players expect there could be more such purchases, as India faces the threat of drought after a strikingly poor monsoon.

During the widespread power blackouts on Monday and Tuesday this week, which affected more than 600 million people, a substantial amount of back-up electricity was produced using diesel-powered generators, Barclays said in a market report Wednesday.

"This has ranged from residential and commercial users ramping up usage of small diesel generators to ad hoc support for infrastructure providers using medium diesel generators," the report said.

"Large diesel generator usage among industries has also ramped up in order to maintain activity."

Inadequate monsoon rainfall has dealt a double whammy to the country's power supply and demand balance: hydroelectric generation has dropped, while power demand for irrigation from farmers trying to save their drying crops by using underground water has spiked.

Barclays expects India's gasoil demand to rise by more than 250,000 b/d in July -- after already having registered a year-on-year increase of 151,000 b/d or 9.4% this season.

Before the latest tender, IOC had already bought 180,000 mt of 320 ppm sulfur gasoil for June and July delivery, as the seasonal spike in demand coincided with maintenance shutdowns at some of its refineries.

IOC is not considered a regular buyer of gasoil, only sporadically picking up cargoes from the spot market to balance its inventory levels, according to sources.

JUNE GASOIL SALES RISE 13.8% ON YEAR

Though official data showed a slight month-on-month dip in June gasoil sales in India, which came in at 6.08 million mt (1.51 million b/d) versus 6.38 million mt in May according to the Petroleum Planning and Analysis Cell under the oil ministry, the figure was still 13.8% higher than a year ago.

Average rainfall across the country between June 1 and July 31 was 19% below the long-term average, according to the latest report by the India Meteorological Department Wednesday.

"A drier monsoon shower has meant farmers have had to rely on diesel-powered pumps to draw water from wells," Barclays said in its report.

"As a measure to ease the farmers' burden, the agriculture minister has announced that the cost of diesel would be halved in areas where rains have been 50% below average up to 15 July, allowing diesel sales to likely rise even further over July," it added.

Meanwhile, Indian refiners ratcheted up gasoil production in June in a bid to close the gap with rising demand for the fuel, PPAC data showed.

Total gasoil production by the country's refiners in June, at 7.67 million mt (1.91 mil b/d), was the highest ever on record, and surpassed the previous peak of around 7.5 million mt in March this year, according to preliminary data from PPAC.

The gap between gasoil production and domestic sales is explained by exports, the majority of which are from the country's two private refiners, Reliance Industries Limited and Essar Oil.

Gasoil exports by RIL and Essar dropped to around 1.73 million mt in June from around 2.28 million mt in May, according to data compiled by Platts from shipping fixtures -- a drop of 24%. India's state-owned marketers probably sourced more gasoil from the private refiners, reducing availability for export, market sources noted.

AUTOMOTIVE SECTOR ALSO VIES FOR DIESEL

The Barclays report also highlighted rising diesel demand from the automotive sector owing to the heavy subsidies the fuel enjoys compared with gasoline, which is sold at international market prices.

"While the subsidies are targeted to the more vulnerable parts of the agricultural sector, the price differentials mean that diesel has been the favored fuel for both automobile and industrial sector use, with diesel gradually taking market share from fuel oil and gasoline," the report said.

Diesel currently retails at Rupees 41.29/liter ($0.74/liter) in the capital New Delhi, substantially lower than gasoline, which sells for Rupees 68.46/liter.

"While a cut in diesel subsidies has been discussed given the impact on the public purse, the government has put it on hold for now, given the current electricity situation," Barclays said.

"Also, it is likely that given the sensitivity of diesel prices to the most vulnerable sections of India's population [agriculture], even if an adjustment of the diesel price upwards is considered, it could potentially be passed through using a one-off charge on buying diesel cars rather than an outright increase in diesel prices," it added.

Goods transport by trucks accounts for the single biggest use of diesel in India, with a 37% share, followed by passenger cars (15%), buses (12%), agriculture (12%), industry (10%), power generators (8%) and railways (6%), according to the last available PPAC breakdown, which dates back to fiscal 2008-09. The exact current share of passenger cars in the diesel demand pool remains contentious and confusing, with a much smaller number -- 0.6% -- mentioned in a report by the Planning Commission earlier this year vigorously challenged and debated.

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