The lockdown in India was put in place firmly and forcibly. On 24 March, with only a few hours’ notice, the Prime Minister announced the country’s $3 trillion economy was effectively closing its doors for three weeks.
These drastic measures had an immediate effect on India’s energy market. At its worst, national power demand collapsed by almost a third year-on-year in late March, with thermal coal consumption dropping by a similar level. Oil and gas demand have fallen by around 20% since lockdown began.
Port operators put in place ‘force majeure’ to shield themselves against having to offtake long-term LNG cargoes at a time of plunging demand, although energy is deemed an “essential service” by the government. As per the Essential Service Maintenance Act, refineries, power plants and fertiliser production as well as domestic coal, oil, gas and electricity supply remain operational.
‘Graded relaxation’
Though PM Modi extended the lockdown for at least another 19 days until May 3, he put in place so-called ‘graded relaxations.’ Starting from April 20, key industries will reopen and allow workers to return. Upstream operations, mines and refineries have continued operating with reduced labour and are hoping that an uptick in the economy will help them towards increasing production.
The demand outlook for energy deteriorates despite modest relaxation of the lockdown, Wood Mackenzie cautioned. Previous expectation of a decline in electricity demand of 30% up to mid-April now continues into May before improving progressively after this.
“The reduction in power demand will impact most sources of generation,” analysts said, though it is worth noting that the Ministry of New Renewable Energy has put all renewables plants on ‘must-run’ status (unless affecting grid stability) during the lockdown.
Demand deteriorates in Q2
Things will likely get worse before they get better in terms of energy use. Oil demand continues to be hit by an extended lockdown, analysts noted, and will remain in the doldrums through much of the second quarter. Crude cargoes bought by Indian refiners for processing during April have limited option to be re-sold in such an oversupplied crude market, so these volumes are likely to be diverted into India’s strategic petroleum reserves.
LNG and pipeline gas demand has been severely affected, primarily across India’s transport and industrial sectors. “As a notoriously price-sensitive market, low oil prices are also a competitive threat to gas. High inventories are resulting in refiners further reducing margins for oil products to compete with gas, leading to downside risk on the LNG demand outlook,” analysts commented
With the extended lockdown, thermal coal demand will reduce by 25-30% through April year-on-year and by a further 9% in the second quarter, reducing consumption to 187 million tons in Q2 against the original forecast of 225 Mt. Wood Mack forecasts thermal coal imports now face a downside risk of an additional 5 Mt in the second quarter to 30 Mt.