India may turn into a net importer of fuel oil as its state-owned refiners are making multi-billion dollar investments to upgrade their refineries and produce more profitable refined products such as gasoline or diesel.
India has traditionally been a net exporter of fuel oil, the residue oil left after initial crude refining that is typically used in shipping and power generation.
That is about to change. Three state-run energy firms -- Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum -- plan to spend $20 billion on refinery expansions to add units by 2022 that would process fuel oil into gasoline and diesel, boosting their output to meet growing local demand for transport fuels.
"Our fuel oil production will be less because everywhere we are going for residue upgrades," said B. Ashok, Chairman of the country's biggest refiner Indian Oil Corp (IOC).
Private refiners Reliance Industries and Essar Oil have already invested heavily to build advanced refineries which produce gasoline at the expense of fuel oil.
With state refiners now doing the same, India will soon have to sharply raise imports of fuel oil, two traders that participate in the market said.
India's net fuel oil exports averaged 109,000 tonnes from April to September, according to the country's Petroleum Planning and Analysis Cell, and the traders estimate this could flip into a need to raise fuel oil imports as early as late 2017.
As a result, the price difference between diesel and fuel oil could narrow further from its current $17.61 a barrel, as Indian shipping fuel demand rises with the government's thrust on the coastal movement of cargoes, considered more cost efficient than road transport.
"Already, gasoil and fuel oil differentials have started shrinking from about $30 three years ago to $16-$18 now and it is likely to narrow further as refiners are destroying fuel oil to produce gasoil and gasoline," said S. Thangapandian, director at Gulf Petrochem.
Indian refiners' expansion plans almost coincide with changing shipping fuel norms from 2020 requiring the use of low-sulphur fuels.
IOC is the biggest expansion investor, planning to spend 500 billion rupees ($7.48 billion) by 2022 to raise its refining capacity by about 30 percent to 2.08 million barrels per day (bpd) including expanding its Panipat refinery in northern India to about 400,000 to 500,000 bpd.
HPCL and BPCL plan to spend $11.25 billion to expand refineries and install fuel oil upgrading units, halting fuel oil output in almost all plants.