The petrochemical shift that could quench LPG output thirst

India may have to lean more on West Asian nations for supplies of liquefied petroleum gas (LPG), a cooking fuel, in the coming years after Indian state-run refiners drew up big plans to diversify into producing more profitable petrochemicals.

This shift leads to reduced LPG output, Indian refining executives said.

The mantra for state-run oil companies, from Indian Oil Corporation (IndianOil) to liquefied natural gas (LNG) importer Petronet LNG, which are looking to diversify their businesses from lower-margin fuels, has been value-added petrochemicals.

Domestic production of LPG declined by 4.5 per cent in the April-June quarter from a year earlier, sending imports higher by 21 per cent to meet the growing demand for the fuel.

Imports accounted for around 65 per cent of the country’s consumption of LPG.

IndianOil, the country’s biggest refiner, aims to more than double the Petrochemical Intensity Index of its refineries to 15 per cent by 2030, with petrochemical expansions integral to all refinery expansions, said company chairman S M Vaidya in the latest annual report.

IndianOil’s petrochemical strategy is primarily based on utilising captive feedstocks, he said.

Propylene, for instance, is a captive feedstock, according to a McKinsey report. So is LPG.

On a global basis, the most important driver of oil demand growth over the medium term is projected to be petrochemicals, accounting for about 2.7 million barrels per day of additional oil product demand during 2023-2030, Paris-based International Energy Agency said in a recent report.

India currently faces a shortage of chemicals and depends on imports from China and the US to meet local demand.

Analysts said that state-run refiners are focusing on polypropylene facilities, a commoditised chemical whose feedstock, propylene, comes from refining processes.

Polypropylene facilities will lead to the displacement of LPG, industry experts said.

Queries sent to state oil-marketing companies (OMCs) were not answered at the time of publishing.

State oil refiners, including IndianOil, Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation, and Numaligarh Refinery, are putting up a combined 3 million tonnes (mt) per annum of polypropylene facilities to make use of the propylene produced in their refineries, according to data provided by CareEdge Ratings.

There are major capacity additions planned for polypropylene, with capacities expected to come on stream from 2025-26 through 2028-29, said Hardik Shah, director of CareEdge Ratings. Imports account for around a fifth of India’s domestic use of the chemical.

The propylene produced comes at the cost of LPG, said R Ramachandran, an oil industry consultant and former director of refineries at BPCL.

“LPG is a negative crack product,” said Prashant Vasisht, senior vice-president and co-group head of corporate ratings at ICRA, a US Moody’s affiliate.

“So refineries are better off manufacturing polypropylene, which adds to gross refining margins.”

Prospects of lower output of LPG come amid New Delhi’s expanding coverage of the fuel. The number of pending applications under the Pradhan Mantri Ujjwala Yojana (PMUY) stood at more than 2.6 million.

OMCs completed the release of 7.5 million additional PMUY connections in September 2023, as part of the third expansion of the scheme.

Demand for fuel has increased after the government provided a subsidy of Rs 300 per 14.2-kilogram (kg) domestic cylinder for 103 million PMUY beneficiaries, allocating more than Rs 9,094 crore this financial year for poor households.

Sales of LPG rose 11 per cent year-on-year to 1 million barrels per day in July as poor, rural households increased the annual refill rate to four of the 12 refills that qualify for subsidies.

Imports of LPG, with the United Arab Emirates and Qatar among the biggest suppliers, rose to 4.56 mt in April-June with demand rising by 5 per cent to 7.07 mt. Higher demand was driven largely by the Rs 300 subsidy per 14.2 kg bottle offered by the government to poor households.

Substitution of LPG with natural gas or dimethyl ether, a product of coal gasification, are alternatives.

LPG “may not yield long-term gains” given the financial and energy risks associated with stagnating domestic production and rising imports, and a reliance on subsidies, according to the Institute for Energy Economics and Financial Analysis.

Some part of lower LPG output would be compensated by city gas rollout and domestic piped natural gas, Vasisht said.