India’s ambitious gasoline-ethanol blending plan has price, supply woes to overcome

Source: By Sambit Mohanty, S&P Global • Posted: Tuesday, May 31, 2022

Surging crude prices have prompted India to set an ambitious goal of achieving 20% ethanol blending in gasoline, a move analysts said could help to cut the ballooning oil import bill, although ensuring plentiful availability of the biofuel at viable prices would be a key challenge.

The recent pledge by New Delhi to advance the 20% blending target — 20% ethanol and 80% gasoline — by five years to fiscal year 2025-26 (April-March) from 2030 is the latest policy measure that India has announced to find ways to battle high oil prices that have pushed up the inflation rate to eight-year highs.

However, analysts said lifting the biofuel blending rate with gasoline from the current 10% to 20% in such a short span of time may be possible only in certain pockets of the country but not across the entire country.

“The major sugarcane and ethanol production regions of Uttar Pradesh, Maharashtra and Karnataka should be able to meet this new mandate,” said Loren Puette, biofuels analyst at Platts Analytics of S&P Global Commodity Insights.

“But on the periphery of India, the potential for long-term fuel ethanol deficits exist. In these regions, ethanol imports may be needed to break past the 10% blending wall and reach the 20% target. Of course, if these regions are able to install new ethanol capacity, then that changes the dynamic,” he added.

India’s gasoline consumption posted a healthy 12.7% year-on-year growth to 30.74 million mt in 2021, from 27.27 million mt a year earlier, according to the Petroleum Planning and Analysis Cell, reflecting a rebound in transportation fuel demand following the pandemic.

The pandemic in 2020 resulted in the first contraction in the demand for oil products since 1999 as India introduced a nationwide COVID-19 lockdown for about two and a half months to combat the spread of the virus.

Policy to battle oil prices

According to a government announcement earlier in May, New Delhi is planning to advance its blending target through an amendment to the National Policy on Biofuels of 2018. The amendment would allow more feedstocks to be used in production of biofuels with an aim to reduce reliance on imported oil.

In addition, the cabinet has also granted permission for export of biofuels in specific cases.

Some market sources added that the amendment could potentially boost production of ethanol and other by-products, as India is the world’s second-largest producer of sugar after Brazil, which remains the primary raw material for ethanol production in the country.

“We believe this is a step in the right direction. We expect multiple benefits of this policy, such as reduction in imports of petroleum products, lesser pollution, as well as help India in moving towards energy independence,” said Sumit Pokharna, vice president at Kotak Securities.

“Given the geo-political uncertainty, elevated crude oil prices, supply bottlenecks and India’s higher dependence on imported crude oil, the government is pro-actively focusing on measures to reduce dependence on oil imports, which is impacting current account deficit and inflation,” he added.

Inflation, based on Consumer Price Index, or CPI, has risen consistently for the past seven months, reaching an eight-year high of 7.8% in April, according to government data.

According to Platts Analytics, Dated Brent prices are expected to average $103/b in 2022, up from $71/b in 2021, before easing to $90/b in 2023.

“Recently, high crude prices have opened a huge opportunity to go aggressive for a higher blending target next year ” said an official of the oil ministry.

India meets around 85% of oil demand via overseas purchases.

Other options may be viable

Vibhuti Garg, lead India energy economist at the Institute for Energy Economics and Financial Analysis, said given current high oil prices and volatility, advancing the blending target would help reduce the import burden and current account deficit, but other options might be more viable.

“Using surplus sugarcane for ethanol production looks to be a win-win situation for all players. However, directing more land for ethanol production can be counter-productive. Solar recharging of electric vehicles is a far more efficient use of land than ethanol crops for blended fuel in India,” she added, quoting a IEEFA study.

Surging agriculture commodity prices also pose challenges in diverting a lot of food commodities for energy use, analysts added.

“Prices of wheat and sugar and vegetable oils have skyrocketed in the wake of the Russia-Ukraine war. Food, weighted at 39%, is the most volatile component and one of the biggest movers of CPI inflation. Food inflation will be driven by the rising costs of production, surging international crop prices and extreme weather-related disruptions,” CRISIL, a unit of S&P Global, said in a research note.