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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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India Is The Best Bet For National Oil Companies

The prospect of peak oil demand is a threat to oil companies around the world, but a much more serious threat to national oil companies, who are responsible for keeping their countries afloat. With the future uncertain, state-owned companies that move into downstream assets overseas could insulate themselves from market upheaval, according to a report from Wood Mackenzie.

National oil companies (NOCs) are not immune to the whims of the oil market, even if they have low production costs relative to their private competitors in shale or offshore. If oil demand hits a peak and begins to decline, high cost producers will be forced out of the market. But even the NOCs will be exposed to weakening oil demand in much of the world.

Wood Mackenzie argues that NOCs can mitigate some of that risk if they invest in refineries outside of their home countries, which “will increase a NOCs’ abilities to place crude in an increasingly difficult market.”

In the past, NOCs have focused on upstream production, and then diversified by building domestic refineries. That vertical integration allowed them to control the whole process and create a market for the upstream crude oil that the company produces. Downstream assets also allowed the country to meet domestic fuel needs, while producing value-added refined products for export. “This provides a platform for industrialisation as part of a broader national development policy,” WoodMac noted.

But the NOCs are now increasingly venturing out overseas, which makes sense as the oil market undergoes dramatic change.

Asia is the logical destination. WoodMac estimates that the Asia-Pacific region will account for 8 million barrels of additional demand through 2035, far ahead of any other region. “It’s where all roads lead in the quest to build exposure to downstream over the next 20 years and beyond,” the consultancy stated. Related: Who Was Buying Iranian Oil And What Happens Next?

So, where will the NOCs go, specifically? WoodMac says the most ideal locations will have a large oil market, strong demand growth and a shortage of refined products. China is the most obvious candidate, checking the box on the first two conditions. But it has plenty of refining capacity. At the same time, while a series of other Asian countries are short on refining, many aren’t expected to see much demand growth.

That leaves India, which fulfills all three conditions: a large oil market, strong demand growth and lack of sufficient refining capabilities. India will lead the world in demand growth at over 3 mb/d through the 2030s.

Against this backdrop, it would make sense for some of the most prominent NOCs to begin acquiring or building refineries in India. Building out downstream units in India will provide NOCs not only with revenue streams in a high-growth market, but it will also secure sales of crude oil, which will be increasingly important as demand slows in the decades ahead.

WoodMac cited the case of Rosneft, which closed on a nearly $13 billion acquisition of Indian refiner Essar Oil last year. It was Rosneft’s first move into Asia’s downstream sector, while also representing the largest foreign acquisition in India. “(Rosneft) has entered the high-potential and fast-growing Asia Pacific market,” Rosneft’s Chief Executive Officer Igor Sechin said in a statement last year.

Meanwhile, Saudi Aramco signed a preliminary deal a month ago with a consortium of Indian refiners, with the understanding that they will build a massive $44 billion refinery and petrochemical complex on India’s West Coast. The refinery will add 1.2 million barrels per day of refining capacity. The deal was only the latest for Aramco, which also recently announced downstream deals for refining and petrochemicals in France and the U.S., totaling about $20 billion. “Large as this project may be, it does not by itself satisfy our desire to invest in India ... We see India as a priority for investments and for our crude supplies,” Saudi Energy Minister Khalid al-Falih said last month. “We’re very much interested in retail ... We want to be consumer-facing.”

Related: Is The Golden Era For Renewables Around The Corner?

The deal makes obvious sense for Aramco, as it will supply half of the crude oil needed at the refinery. Aramco’s oil sales are essentially locked in.

Downstream deals in India “will arm these companies, which are already low on the supply cost curve, with highly competitive refining assets capable of weathering changing product consumption as India’s economy grows and the energy transition starts to take effect,” WoodMac wrote.

Even if oil demand hits a peak, consumption will remain at high levels for a long time. And in India, it will continue to grow. NOCs such as Aramco and Rosneft will insulate themselves from the risks of the global transition to cleaner fuels by locking in downstream assets in growing markets, with India representing the best bet for the NOCs as the oil market faces long-term upheaval.

By Nick Cunningham of Oilprice.com

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