By ERIC YEP and RAKESH SHARMA
When the lights go out in India and diesel generators kick in to provide backup power to tens of millions, India's use of diesel as a fuel of last resort, and the country's weight in the regional market, come into sharp focus.
Although the unprecedented scale of blackouts across northern India this week won't have an immediate or big impact on import needs, a long-term and continuing rise in India's diesel use is important for the regional trade in refined oil products, and it will continue to influence decisions on pricing and refinery investment.
The demand for diesel, irrespective of seasonal variations, has been continuously on the increase. There is more demand because diesel is being consumed more in every sector, Indian Oil Minister Jaipal Reddy said Wednesday.
This need coincides with an increasing Asian diesel supply deficit and a growing gasoline surplus, which is expected to prompt refiners in emerging Asian economies to adjust their output levels of the two fuels, Wood Mackenzie energy analyst Sushant Gupta said in a report Thursday.
While Indian state refiners diesel deficits continue to be the largest in the region, China's strong demand growth becomes the main driver of diesel trade flows in the region by 2015, Mr. Gupta wrote.
Total Asian demand for diesel/gasoil is expected to grow from 8.65 million barrels per day to 9.78 million barrels a day from 2012 to 2015, he said.
This week's blackouts in India forced countless shops and businesses to fall back on diesel-powered generators, causing a temporary surge in use of the fuel at a time when demand was already high due to water pumping in the drought-hit in parts of the country, and government subsidies that keeps domestic diesel prices low.
Based on 2009 data, when a drought in India pushed up diesel use, a prolonged power shortage for up to a month may result in diesel demand growing by 2.25-3 million bbl/month over normal demand, a Singapore-based analyst said.
However, Indian oil companies are confident that they won't need to resort to additional diesel imports. India is a net exporter, as private refiners Reliance Industries and Essar Oil typically sell their output abroad while state-run companies sell into the subsidized domestic market.
We are seeing a surge in demand but we are not importing. We are meeting additional demand through supply from our Bina refinery, R.K. Singh, chairman of Bharat Petroleum, said.
Even so, there are some shortages in parts of India due to bottlenecks in getting fuel moved to the most-needy areas.
Indias diesel use rose 13.7% on year in June and a "dieselization of the economy" is becoming more pronounced as it is substituting not only fuel oil and gasoline, but also natural gas, the government said in a recent report.
India has enough refinery capacity to meet domestic needs, although it relies on imports to meet around three-fourths of the crude-oil it uses.
India only imports diesel when there is a shortfall such as during refinery turnarounds, of about 450,000-1.13 million barrels a month depending on the situation, a Singapore-based trader said.
However, the ability of India's private refiners to divert exports to the local market is limited by tax constraints, a different product slate and term commitments to foreign customers.
Reliance Industries, India's largest refiner with a total capacity of 1.24 million bpd, is a key exporter with the capacity to export about 7.5 million bbl/month of diesel from its two Jamnagar refineries.
One of these enjoys tax concessions, which prohibit the sale of its output in the home market. But Reliance is understood to have already diverted output from its domestic refinery into the local market, seeking to benefit from the summer demand rise.
Dow Jones Newswires