Analysis: India's biodiesel dreams - too many hurdles to overcome

18.08.2016

India has pledged to create a more investor-friendly climate to promote biodiesel in its efforts to partly cut dependence on crude imports, but progress is likely to be at snail's pace given lack of clarity on blending and pricing, feedstock woes and a cautious approach of consumers.

The government said last week it had extended the biodiesel blending program, which started last August as a pilot project in five cities, to a total of six states.

It would involve diesel blended with biodiesel being sold through nearly 2,200 retail outlets in the country.

"The potential for biodiesel is enormous in India, but we need a coordinated plan of action. Not a few steps here and there," said R K Pachauri, former chairman of The Energy and Resources Institute in India.

"A lot of education for the public needs to be done before it can be a success. We need to have a proper roadmap for the next eight to 10 years -- on things like pricing and the incentive that needs to be provided," he added.

While India does not have a biodiesel blending mandate, the government has proposed that state-owned oil companies begin blending up to 5% biodiesel into gasoil for sales at company-owned petrol stations in a limited number of cities.

Currently, state-owned oil companies only blend whatever biodiesel they are able to find from Indian suppliers.

"Advanced biofuel production [in India] remains nascent as commercial production and economic viability remain a challenge," the USDA Foreign Agricultural Service said in a recent study, adding that the current average Indian blending rate is only 0.1% for biodiesel.

India has five to six large plants -- with annual capacities ranging from 10,000 mt to 250,000 mt.

They are using less than 30% of the installed capacity to produce about 130-140 million liters/year of biodiesel from multiple feedstock.

The biodiesel produced locally is bought by small and medium enterprises, according to a USDA FAS report.

State-run refiners Bharat Petroleum Corp. last month floated a joint tender with Indian Oil Corp. and Hindustan Petroleum Corp. Ltd. for a reduced quantity of 20,460 kl biodiesel, after seeing subdued interest in previous tenders because of lack of domestic biodiesel availability.

The current tender, which is open to only domestic biodiesel producers, is the third or fourth tender floated by BPCL so far.

The tenders floated last year aimed to procure about 1.4 million kl biodiesel. But oil companies were unable to find suppliers domestically to meet that demand.

Industry officials, however, are hopeful that the current tender might see a more positive response, despite the lack of clarity on policies.

"There is no mandate for biodiesel. It is only a government proposal," said an official with a state-run oil marketing firm.

Some industry officials are of the view that low crude prices -- which have fluctuated from record highs of just under $150/b to high-$20s/b earlier this year -- was making it difficult for the biodiesel industry to take off in India, like in many other countries.

But analysts pointed out that the development of the industry needed to be carried out with a much longer term view.

"Today, crude oil prices are low but that's not necessarily going to be the case over the next five to 10 years. A carefully orchestrated effort is needed to promote biodiesel irrespective of where crude prices are," Pachauri added.

THE ETHANOL PUSH

The country's petroleum ministry also said last week that the government was trying to give a big push to the ethanol program, moving closer to achieving a 4% ethanol blending in gasoline during the current sugar crop year ending September 2016.

However, this would still be far below the government's stated target of 10% blending.

According to the latest biofuel mandate, state-owned oil marketing companies, or OMCs, have to buy fuel-grade ethanol from domestic producers at a fixed price differential to the retail gasoline price.

The OMCs are currently not allowed to use imported ethanol to blend with gasoline.

After the BJP government came to power in 2014, ethanol procurement prices for OMCs were set in December 2014 at Rupees 48.5-49.5/liter. OMCs achieved roughly a 2.5% blending on average in fiscal year 2015-16 (April-March), Credit Suisse said in a research note.

"The government's target of 5% blending of ethanol in gasoline was partially successful in years of surplus sugar production and [remained] unfulfilled when sugar production declined," USDA's FAS said.

But it added that policy decisions, such as deregulating diesel prices, allowing private biodiesel manufacturers to sell biodiesel directly to consumers and a fixed pricing mechanism for fuel ethanol procurement for OMCs had helped to induce some momentum to the biofuels program.

Petroleum minister Dharmendra Pradhan said last week that there was a potential for India's biofuels business to grow to Rupees 100 billion ($1.5 billion), from the current Rupees 65 billion, in the next 10 years.

"The Prime Minister has set a target of 10% import reduction in crude by 2022 and biofuels can play an important role in achieving the target. Shifting the fuel consumption profile to biofuels derived from domestic feedstock would lead to decrease in this dependence on crude oil imports," a government statement quoted Pradhan as saying.

India currently imports about 80% of its crude oil requirements.


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