Iran War has hit all segments of India’s oil, gas imports. Why is stress most visible in LPG sector?

Given the scale of LPG use in homes, the government has prioritised LPG supplies to households over commercial and industrial consumers, which has led to massive shortage of the fuel for these non-household segments across India. It has also ordered refiners to maximise LPG production, and directed them to divert propane, butane, and other streams from petrochemical manufacturing to LPG production.

The government has also increased waiting times between cylinder bookings by households from 21 days to 25 days in urban areas and 45 days in rural areas. Such is the supply crunch, particularly for commercial consumers, that the government has activated alternative fuel streams like kerosene, fuel oil, biomass, and even coal for them.

Panic, govt assurances, appeals to consumers

While the government has said that LPG supplies to households are being maintained at pre-West Asia conflict levels with the help of these measures despite the difficult situation of constrained imports, there have been numerous complaints of hoarding, black marketing, and lack of availability of cooking gas cylinders from various parts of the country. News and social media is replete with visuals of snaking queues at LPG distributorships

The government, on its part, has blamed panic-booking due to misinformation and shortage rumours for the situation, and has been regularly appealing to consumers to avoid rush-booking of cylinders, and only make a booking when a cylinder is actually required. According to data shared by the Petroleum Ministry on Saturday, average LPG bookings by households averaged at 55.7 lakh cylinders in the April-February period of the current financial year, but the number jumped over 35% to 75.7 lakh on Thursday, and further to 88.8 lakh on Friday.

It added that oil marketing companies (OMCs) are maintaining their earlier average of over 50 lakh cylinder deliveries per day and none of the 25,000-odd LPG distributorships across the country have reported a “dry-out”—running out of stock.

Furthermore, the government has urged all those living in the vicinity of household piped natural gas (PNG) connectivity, but still using LPG, to switch to piped gas. According to the government’s estimates, there are 60 lakh such households; India has over 33 crore households with LPG connections.

Along with state governments and district administrations, it has also started cracking down on instances of hoarding and black marketing of LPG cylinders. The government has also asked city gas distribution operators to facilitate PNG connections for commercial LPG users wherever feasible.

Why is LPG the hardest-hit fuel segment amid the Iran war?

At the heart of the problem is extreme reliance on the critical chokepoint of the Strait of Hormuz, where maritime traffic has effectively come to a halt since the conflict began two weeks back. While the Strait of Hormuz — the narrow waterway between Iran and Oman that connects the Persian Gulf with the Gulf of Oman and the Arabian Sea — is critical for India’s oil, LNG, and LPG imports, the country’s dependency on the passage for LPG supplies is particularly high.

India’s annual LPG consumption is currently estimated at around 33 million tonnes, of which domestic production is around 13 million tonnes, or around 40%. This means that India’s import dependency for LPG supplies is around 60%. Now, in the case of crude oil, the reliance on imports is much higher at over 88%. So why is it that so far India appears to be doing fine on crude oil and major fuels like petrol and diesel, while LPG supplies have been affected?

A key reason is that India’s reliance on the Strait of Hormuz for crude is around 40%, while in the case of LPG, it is a whopping 90%. This effectively means that with the chokepoint all but closed, as much as 54% of India’s LPG supply has simply disappeared.

Although the government’s emergency measures have led to about 30% increase in domestic production of LPG vis-à-vis the pre-conflict levels, it essentially translates to just 10-12% of additional production when total consumption is considered. So even with higher LPG output from domestic refineries 42-44% of the country’s LPG supply is still offline for all intended purposes.

The government and oil companies are getting some LPG cargoes from non-Hormuz regions, particularly North America, but these will take weeks to reach India than West Asian cargoes, which usually take a few days.

Why is there no panic on crude oil, petrol, diesel supplies?

As for crude, getting extra cargoes from regions other than West Asia has been relatively easier and faster so far as compared to LPG, or even LNG. For instance, millions of barrels of Russian crude that were idling in tankers in international waters around India before the conflict are taking just a few days to arrive at Indian ports. India also has relatively higher levels of stockpiles of oil, petrol, and diesel, as compared to LPG and even LNG, which have hardly anything additional stocked up beyond what is there in the supply chain.

The Liberia-flagged tanker Shenlong carrying crude oil berths at the Jawahar Dweep terminal of Mumbai Port in Mumbai, Thursday, March 12. PTI

Last week, a top government official had said that India had six-eight weeks of crude and petrol and diesel stocks put together—including commercial stocks as well as strategic reserves—and expected the position to remain “comfortable” going forward as well, considering additional volumes of oil from non-Hormuz-dependent regions were being bought, apart from the regular oil supply from outside West Asia continuing unabated.

With the US removing pressure it had earlier imposed to dissuade India from buying Russian oil in large volumes, New Delhi’s daily average oil imports from Moscow have already shot up by over 50% from February levels. And they are poised to rise further.

“Crude supply risk can be partially mitigated through diversification and Russia flows. Refined product supply remains relatively comfortable. LPG availability is the real variable to monitor in the coming weeks,” said Sumit Ritolia, Lead Research Analyst, Refining & Modeling at Kpler, a commodity market analytics firm.

What about natural gas supplies?

There is some stress in natural gas supplies as well, although not as much as what is being seen in the LPG segment. India depends on imports to meet around half of its natural gas needs, and roughly 60% of those imports came through the Strait of Hormuz, mainly from Qatar and the UAE. This means that the Strait’s effective closure has cut off roughly 30% of India’s natural gas supplies.

In view of the supply disruption, the government has decided to divert natural gas to the critical “priority sectors” that are dependent on the fuel. Segments that directly impact millions of common consumers—PNG for households, compressed natural gas (CNG) for vehicles, and LPG production—will have precedence over other natural gas-consuming sectors. Also, as is the case with crude oil and LPG, Indian oil and gas companies are actively scouting for spot LNG cargoes from regions other than West Asia.

Autor drivers queue to refuel their vehicles with CNG in Hyderabad on Saturday. AP

The government order on prioritisation of natural gas supplies lists four priority categories that shall receive, subject to availability, natural gas in varying quantities based on their average gas consumption levels of the past six months. The top priority category, which will receive 100% of the average gas consumption of the last six months, include PNG for households, CNG for transportation, natural gas used for LPG production, and gas consumed for essential pipeline operations.

Apart from being produced from crude oil, LPG is also extracted from natural gas. The second priority category, according to the order, is fertiliser units, which will receive 70% of their average gas consumption of the past six months.

The third category includes “tea industries, manufacturing and other industrial consumers supplied through the national gas grid”, for which supply will be maintained at 80% of their six-month average consumption.

In the fourth category are commercial and industrial consumers of city gas distribution companies; they will get 80% of their past six-months average gas use. Apart from domestic gas and imported LNG, the natural gas required to meet the demand of these priority sectors will be met “through full or partial curtailment” of gas supplied to some petrochemical manufacturing units, gas-based power plants, and consumers of domestic gas produced from difficult blocks.

Natural gas supplies to refineries have also been cut to 65% of their average consumption of the past six months.