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Analysis: As LPG demand balloons, India to become more reliant on imports

http://www.chemnet.com   May 13,2016 Platts
A raft of government initiatives has propelled India's insatiable appetite for LPG to record highs, leading analysts to believe that growth is expected to hover close to double digit levels in the near to medium term as New Delhi intensifies its push towards cleaner fuels.

But with LPG domestic demand growing at a much faster rate than output, the country, where refiners find it more profitable to focus on middle distillates rather than boosting LPG output, will be increasingly dependent on imports to meet its incremental consumption growth, analysts added.

LPG demand in March hit a record high of 1.835 million mt, up 14.16% year on year, taking the cumulative demand in January-March 2016 to 5.254 million mt, up 11.28% year on year, data from India's Petroleum Planning and Analysis Cell showed.

The growth in March meant that LPG consumption has recorded positive growth over 31 months in a row.

Top officials of Indian oil companies and independent analysts recently told Platts that even though demand growth is unlikely to hold at those lofty levels, LPG demand will continue to grow around 7%-9% over the coming years.

"Lower prices and various affirmative government initiatives will support India's robust LPG demand growth in the medium term," said Sri Paravaikkarasu, Senior Consultant and Asia Downstream Specialist at Facts Global Energy.

Paravaikkarasu said around 2.1 million new LPG connections were added across the country in March, which contributed to the surge in demand.

In addition non-subsidized LPG consumption grew by 35% year on year in March.

"We expect demand growth to remain strong in the coming quarters, albeit at slightly reduced levels than that seen in recent months," Paravaikkarasu said.

PPAC said that LPG demand from India's auto sector grew 3.3% year on year n March, while cumulative growth was 4.3% over fiscal year 2015-2016 (April-March).

"Even commercial LPG is now substantially cheaper than gasoline/diesel due to the multiple hikes in excise duties on these liquid fuels. This makes LPG attractive for auto LPG usage too," Macquarie said in a research study on India's oil sector.

India's LPG demand rose 8.6% year on year to 19.55 million mt in fiscal year 2015-2016, while the country imported 8.88 million mt of LPG over the period to meet its domestic needs.

Industry sources have said that India's LPG imports could surge in fiscal year 2016-2017, prompting the country to compete with Japan and China for the title of Asia's biggest importer.

"India's LPG imports will keep rising," said Paravaikkarasu. "Other than the recent Paradip refinery, we are not going to see any other grassroot additions in the near future. This will restrict growth in domestic supplies."

Paravaikkarasu said she expects India's LPG imports to rise 30,000 b/d year on year during fiscal year 2016-2017.


The BJP-led government, since coming to power in 2014, has undertaken a series of initiatives to help boost LPG penetration across the country.

In its push towards making 2016 the "year of LPG consumers," the Indian government has set an ambitious target of opening 10,000 new LPG dealerships across the country this year, in addition to the 16,000 that already exist.

It has urged the more affluent class of society to give up their subsidized LPG connections. Around 10 million consumers have given up their LPG subsidies already.

The government has also made an effort to pass on those savings to the more needy.

"LPG use has increased rapidly in the last few years, reflecting growing urbanization, as well as continued subsidies," said Amrita Sen, Chief Oil Analyst at Energy Aspects.

"And even though the government continues to reduce subsidies for high-income households, its aim of doubling the number of households -- specifically expand the overall consumer base by 60% over the next three years -- with access to LPG by 2020 will continue to support the fuel's demand," she added.

In the recent annual budget, the Indian government unveiled a welfare scheme, which would provide LPG connections at concession rates to women living below the poverty line.

Over 15 million LPG connections at concession rates are expected to be given in fiscal year 2016-2017 starting this April.

In addition, the government is urging the state-run oil marketing companies to ramp-up new dealerships nationwide to avoid supply shortages.

"The government has mandated oil marketing companies to grow LPG dealerships by around 60% this year. We believe this improvement in LPG penetration can help sustain double-digit demand growth," Credit Suisse said.

Analysts said that as New Delhi pushes LPG use, kerosene demand would fall in coming months and years. "LPG demand is driven by the government trying to displace kerosene/firewood," Macquarie said.

That view was evident in the March numbers. Kerosene demand in India fell 4% year on year to 566,000 mt in March and was down 3.5% year on year in first-quarter 2016.


The growth in LPG production at Indian refiners has been limited because of relatively higher emphasis on middle distillates production where margins are better.

Indian refiners produced 10.5 million mt of LPG in fiscal year 2015-2016, up 7% from 9.8 million mt produced in the previous year, but LPG still accounts for under 5% of their total products output.

In comparison, middle distillates account for 50% of total output.

Indian Oil Minister Dharmendra Pradhan told Platts in an interview earlier this year that economics showed that LPG imports would be more competitive than producing the fuel domestically and the country would remain dependent on imports to meet about 50% of its domestic needs.

And to meet the growing imports, the country would be focusing on creating a solid distribution network and terminals to handle the additional volumes, Pradhan said.

"While imports are likely to surge as a result, the lack of an adequate distribution network can be a challenge," Sen of Energy Aspects said.

New Delhi in recent years has pushed several initiatives to expand LPG infrastructure in order to facilitate better distribution of the cleaner fuel.

State-run Indian Oil Corp. is building a pipeline from Paradip to Durgapur via Haldia with the aim to expand the distribution of cooking gas in the eastern region. The pipeline will be extended up to Muzaffarpur via Patna.

Another state-owned refiner, Hindustan Petroleum Corp. Ltd, in recent years has upgraded its facility at Mangalore import terminal to receive VLGCs and is building the Mangalore-Hassan-Bangalore-Mysore LPG pipeline.

Privately run Total Oil India Pte. Ltd. also launched an LPG unloading facility at New Mangalore port last year.
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