India-Pakistan tensions raise concern for energy markets

The sharp escalation in tensions between nuclear-armed neighbors India and Pakistan could have wide-ranging and serious humanitarian implications for the region.

The flare-up of tensions has also brought to the forefront the importance of emergency preparedness in the energy sector, as a prolonged conflict would severely impact the ability of both countries to meet their energy needs.

In terms of daily crude demand, India consumes 5.40 million barrels per day (bpd) compared to Pakistan's 0.25 million bpd, according to Rystad Energy analysis.

A comparison of their strategic petroleum reserves reveals a significant disparity – India has a strategic reserve capacity of 39 million barrels, with 21.4 million barrels currently available.

In contrast, Pakistan lacks any strategic reserves, potentially leaving the nation vulnerable to disruptions in supply.

This gives India a reserve coverage of approximately seven days, based on its existing strategic reserves.

In addition, India's commercial stockpiles of close to 160 million barrels can sustain the country for around 33 days, whereas Pakistan's stockpiles will last for 20 days.

While India’s crude oil stockpile obligations are managed through a combination of government-owned strategic reserves and company-owned commercial reserves – with no fixed legal requirement – Pakistan has a clear regulatory requirement of a 20-day stockpile of refined products, mandated by its Oil and Gas Regulatory Authority (OGRA).

As the third-largest global crude importer, India's reliance on imports is significant, with 85% of its demand being met through imports.

Pakistan, too, relies heavily on imports, meeting around 78% of its demand.

Refineries on both sides are located away from the conflict region, removing the likeliness of an impact to the refinery operations.

While the absence of refineries and LNG terminals in the affected regions may not impact crude and LNG imports, the disparity in emergency preparedness between India and Pakistan is a cause for concern.

The risk of direct attacks on commercial vessels is rare and prohibited under international law. Still, the risk of military confrontations or a misunderstanding, especially in areas close to naval operations, increases during times of heightened tension.

Tankers passing through the region could be subject to scrutiny or diversion if the situation escalates.

India’s key refining hubs in western Gujarat handle over 50% of the country’s daily crude imports, with the Sikka, Vadinar and Mundra ports supplying six refineries.

In the next five days, five Middle Eastern crude cargos are set to arrive – two already in Indian waters, with the other three carrying over 5 million barrels of Arab Light and Basrah Heavy are en route.

In addition to military action, India has escalated pressure through key diplomatic and infrastructure decisions, as discussed after the 22 April event.

It suspended the Indus Waters Treaty, expelled Pakistani diplomats, and began fast-tracking five hydroelectric projects in the Jammu & Kashmir region with a combined capacity exceeding 4,000 MW.

These projects had faced delays partly due to treaty-related constraints, and the suspension effectively removes procedural barriers to their advancement.

In anticipation of possible supply chain shocks, India could increase crude purchases for strategic reasons which might support prices in the short term.

Pakistan is also heavily reliant on LNG imports to maintain a fragile energy balance, leaving it acutely exposed to price shocks and supply disruptions. In addition, India’s suspension of the Indus Waters Treaty further threatens Pakistan’s energy system, as over 30% of its electricity depends on hydropower drawn from the Indus basin.

The suspension of a decades-long treaty governing shared water supply could potentially threaten 90% of Pakistan’s installed hydropower capacity.

Escalating conflict between India and Pakistan poses risks to the energy and water security of both nations, with the recent suspension of a decades-long treaty governing shared water supply potentially putting 90% of Pakistan’s installed hydropower capacity at risk.

Tensions between the two South Asian neighbors, which have ratcheted up following the launch by India of miliary operations inside Pakistan on 7 May, could also further destabilize critical power grid infrastructure in both countries.

With the Indus Water Treaty (IWT) central to both nations, India has 2.7 gigawatts (GW) of hydropower projects dependent on the rivers included in the IWT out of a total of 52 GW of installed hydropower capacity countrywide.

The largest project at risk is the 900-megawatt (MW) Bagilhar Dam with inflow from the Chenab.

Disruption to these projects will have a relatively small impact as hydropower only contributed 8% to total power generation in 2024.

On the other hand, any further escalation in tensions between India and Pakistan could put energy infrastructure, including nuclear power plants in both countries, at greater risk of becoming military targets.

Rystad Energy analysis indicates disruption to the IWT could put up to 9.3 GW of hydropower capacity – equivalent to 90% of Pakistan's total installed hydropower capacity – at risk.

The largest hydropower project at risk is the 4.9-GW Tarbela Dam with inflow from the Indus.

On balance, the impact of the IWT suspension will be more severe for Pakistan than for India.

Reduced inflow from the Indus and Jhelum rivers will compromise Pakistan’s grid stability and ability to meet peak power demand, especially in the summer months, potentially leading to widespread blackouts.

If the IWT were to be terminated altogether, India would gain control of the Indus, Jhelum and Chenab rivers, and could build more hydropower projects in the region.

India could potentially also operate its existing upstream hydropower facilities in ways that might adversely impact its downstream neighbor, including through sediment flushing and sudden reservoir water releases that could cause flooding.

However, no steps have been taken in this direction at present, and any international backlash from such unilateral actions could be significant.

Apart from the immediate energy security implications, escalating tensions will also likely endanger investment in long-term projects that are more sensitive to economic instability, such as the Thatta green hydrogen project in Pakistan.

Even more mature projects that have already received final investment decisions, such as AM Green Ammonia's green ammonia plant in Kakinada, India could face supply chain disruption and significant delay.