India sends out clear signal of its clout, foreshadowing coming changes in world oil scene
When India’s government last month asked refiners to speed up diversification and reduce dependence on the Middle East – days after OPEC+ said it would maintain production cuts – it sent a message about its clout and foreshadowed changes to the world’s energy maps. It was a move that had been in the works for years, fuelled by repeated comments from Indian Oil Minister Dharmendra Pradhan, who in 2015 called oil purchases a “weapon” for his country. When the Organisation of Oil Exporting Countries and Major Producers (OPEC+) extended the production cuts into April, India unsheathed that weapon. Indian refiners plan to cut imports from the Kingdom by about a quarter in May, sources told Reuters, dropping them to 10.8 million barrels from monthly average of 14.7-14.8 million barrels. Oil secretary Tarun Kapoor, the top bureaucrat in the ministry, told Reuters that India is asking state refiners to jointly negotiate with oil producers to get better deals, but declined to comment on plans to cut Saudi imports. “India is a big market so sellers have to be mindful of our country’s demand as well to keep the long-term relationship intact,” he said. The Saudi state oil company Saudi Aramco and the Saudi energy ministry declined to comment. Pradhan, who sees high oil prices as a threat to India’s recovering economy, said he was saddened by the OPEC+ decision. India’s fuel import bill has rocketed, and fuel prices – inflated by government taxes imposed last year – have hit records. The International Energy Agency forecasts India’s consumption to double and its oil import bill to nearly triple from 2019 levels to more than $250 billion by 2040. An oil ministry official, who declined to be named because of the sensitivity of the matter, said the OPEC+ cuts have created uncertainty and made it difficult for refiners to plan for procurement and price risk. It also creates opportunities for companies in the Americas, Africa, Russia and elsewhere to fill the gap. If India is successful, it will set an example for other countries. As buyers see more affordable choices and renewable energy becomes increasingly common, the influence of big producers like Saudi Arabia could wane, altering geopolitics and trade routes. DIVERSIFICATION DRIVE India’s oil demand has risen by 25% in the last seven years – more than any other major buyer – and the country has surpassed Japan as the world’s third-largest oil importer and consumer. The country has already curbed its reliance on the Middle East from more than 64% of imports in 2016 to below 60% in 2019. That trend reversed in 2020, however, when the pandemic pummelled fuel demand and forced Indian refiners to make committed oil purchases from the Middle East under term contracts, shunning spot purchases. As India shifts gears again after Pradhan’s call for faster diversification, refineries are looking for new suppliers, the oil ministry official said. Costly refinery upgrades that allow for the processing of cheaper, heavier oil grades have encouraged importers to seek out far-flung sources. HPCL-Mittal Energy Ltd bought the country’s first cargo from Guyana this month, and Mangalore Refinery and Petrochemicals Ltd just imported Brazilian Tupi crude for the first time. In past years, refiners have jointly negotiated oil deals with sanctions-hit Iran, which offered free shipping and price discounts, and now plan to do the same with other producers. Since the break with Saudi Arabia began, Pradhan has had meetings with United Arab Emirates’ minister of state and chief executive of Abu Dhabi National Oil Co (ADNOC), Sultan Ahmed Al Jaber, and U.S. energy secretary Jennifer Granholm to strengthen energy partnerships. Pradhan recently said African nations could play a central role in India’s oil diversification. The country is looking at signing long-term oil supply deal with Guyana and exploring options to raise imports from Russia, the oil ministry source said. A separate Indian government source said the government expects Iranian sanctions to ease in three to four months, potentially offering India a cheaper alternative to Saudi oil. Two traders agreed that Iran stood a good chance to benefit from India’s shift, as did Venezuela, Kuwait and the United States. An Indian refinery source said the U.S., Africa, Kazakhstan’s CPC Blend and Russian oil would probably get a look too. Although Indian importers will scoop up increasing volumes of attractively priced global grades, most analysts expect the Middle East to remain India’s primary oil supplier, mainly because of lower shipping costs. India’s oil ministry is working with refiners on a framework to jointly negotiate terms with suppliers. “Buyers have alternatives in today’s market and these alternatives are going to multiply going forward,” Kapoor said. “There are so many companies in India that do buying at their own level, so these companies coming together also becomes quite a big bloc.” On Thursday, Saudi Arabia and OPEC+ agreed after discussions with U.S. officials to ease oil curbs beginning in May. Saudi energy minister Prince Abdulaziz bin Salman conceded that the production cuts had put state oil company Aramco “in some difficulty with some of its partners.” THE RELATIONSHIP Analysts say the oil spat does not need to spill over into broader strategic ties in other sectors, including defence. “Until recently, the balance of power was skewed towards Saudi Arabia, but increasingly, India is using access to its market and the diversity of options to put pressure on Saudi Arabia,” consultancy Eurasia said in a note. “For Saudi Arabia, losing market share in a global environment in which most developed economies are already seeing their oil demand decline due to green policy implementation, would be a blow.” Abdulaziz confirmed that Aramco had maintained normal April oil supplies to Indian refiners while cutting volumes for other buyers – a sign Saudi Arabia is concerned about India’s search for new sources. Saudi Arabia is India’s fourth-biggest trade partner, importing a slew of items, including food. Saudi Armaco is looking at buying a 20% stake in Reliance Industries’ oil and chemicals business. It is also a part
Indian refiners may take less Saudi oil next year if contract terms are ‘unfavourable’
Indian state refiners may seek a smaller purchase deal for Saudi oil next year to pressure the kingdom into altering some of the contractual terms ‘unfavourable’ to the buyer, a person with direct knowledge of the matter said. “We can reduce the quantity in term contract next year if terms are not favourable to us,” the person said. Saudi Arabia is one of the top suppliers to India and most state and private Indian refiners have depended on it for supplies for decades. Refiners, however, feel some of the terms of the Saudi annual deals are unfavourable to India and must change quickly. “Contract should become flexible. Right now, it’s seller’s monopoly,” said the person cited above. “We can’t take more when prices are low. Nor can we order less when prices rise because orders are placed so much in advance and there are certain broader monthly commitments,” he added. For instance, a buyer must offer its loading plans for May by April 5. Refiners want ‘price flexibility’ and ‘certainty of supply’ even during times when production falls due to various reasons, he said. The annual contract permits Saudi to cut supplies to the buyer in the event of the organisation of petroleum exporting countries (OPEC) agreeing to artificially reduce production, the person said, calling the provision ‘unfavourable’ to the buyer. The OPEC output cut to boost oil prices has been at the heart of recent tensions between India and Saudi Arabia. After Saudi and allies ignored India’s call to increase supply last month, Indian state refiners discussed the possibility of taking less oil in May. Purchase contracts with Saudi permit refiners to vary volumes by month but the overall annual commitment must be honoured. India, the third-largest consumer of oil, hopes to use the might of its market to change the terms of engagement with big suppliers. State refiners plan to collectively bargain purchase terms with suppliers. They also plan to coordinate with Indian private refiners and share industry intelligence. To reduce dependence on Middle-East producers, Indian refiners are scouting for other supply sources. They are now sourcing more from the US. An Indian refinery has also taken the first consignment of oil from Guyana. Due to its geographical proximity, the middle-east can, however, supply cargoes in less time and at low freight rates. India imports 85% of its oil needs and is vulnerable to global supply and price shocks. It wants to have a diversified supply base.
Reliance Industries, BP seek bids for gas from their KG D6 block
Reliance Industries and BP have sought bids for 5.5 million metric standard cubic meters per day (mmscmd) of gas available for sale from their KG D6 block. The e-auction is slated for April 23 and the gas supply will start from late April or early May, as per the tender document. Bidders will have to quote a price linked to Platts JKM (Japan Korea marker), the liquefied natural gas (LNG) benchmark price assessment for spot physical cargoes. The lowest bid that can be placed is JKM minus $0.3 per mmBtu. The highest acceptable bid would be JKM plus $2.01 per mmBtu. Bidders can seek a supply tenure of 3 to 5 years. The minimum volume one could ask for is 0.01 mmscmd and the maximum could be the full volume on offer. Reliance and BP have the freedom to market and price the gas produced from the deepwater gas fields of R Cluster, MJ and Satellites in the KG D6 block but prices can’t rise above a ceiling the government revises every six months. The current price ceiling is $3.62 per mmBtu.
Low gas prices to impact financial performance of upstream oil and gas companies
The domestic natural gas price notified at $1.79 per unit for the first half of 2021-22, lowest since the institution of the modified Rangarajan formula, is unfavourable for domestic oil and gas producers and will significantly impact their financial performance, according to ICRA. At such low gas prices, gas production remains a loss-making proposition for most fields for the upstream producers notwithstanding some decline in oil field services and equipment costs, the rating agency said. The absence of a floor and sustained low prices as has been seen in the past few years post implementation of the modified Rangarajan formula makes exploration and production unviable even for benign geologies, it said. “Accordingly, low natural gas prices remain negative for the upstream sector adversely impacting revenues, profitability and cash accruals and the incumbents have petitioned the GoI to provide a floor price for gas prices,” said Sabyasachi Majumdar, Senior Vice President at ICRA. He added that going forward, the supply glut is expected to keep prices of domestic gas low in the near-to-medium term leading to poor returns even as domestic gas producers such as ONGC and RIL-BP ramp up gas production significantly. Also, the ceiling on price for gas produced from deep water, ultra deepwater, high temperature and high-pressure fields has also been announced at $3.62 per unit for the period between April and September 2021, 10.8 per cent lower than the price ceiling of $4.06 per unit for the period between October 2020 and March 2021. This would dampen the development of such projects.
Gujarat added most CNG stations in India
Continuing its thrust on the usage of clean fuel, Gujarat added the highest number of compressed natural gas (CNG) stations in India during the April-January period in 2020-21. In fact, the state accounted for 20 per cent of the new CNG stations developed in the country during the period. The number of CNG stations in Gujarat increased by 102 to 738 by the end of January 2021 as compared to 636 CNG stations on April 1, 2020. The information was released by the rating agency Care Ratings, which cited the data from Petroleum and Planning Analysis Cell, the Union ministry of petroleum and natural gas. Gujarat figures include CNG stations in Dadra and Nagar Haveli, Daman and Diu. The total number of CNG stations across the country increased by 506 to 2,713 as on January. The number was 2,207 at the beginning of the fiscal 2021. Gujarat was followed by Uttar Pradesh (89 new refuelling stations), Maharashtra (70), Odisha (47), Haryana (40), and Rajasthan (34). Gujarat is covered 100 per cent under the city gas distribution network with the Petroleum and Natural Gas Regulatory Board (PNGRB) awarding natural gas retailing licences to all the geographical areas in the state. As a result, more and more CNG stations are being set up in the state, said an industry source. The government’s push for cleaner fuel along with a deeper penetration of natural gas have led to the establishment of more CNG stations in the state, added industry players. City gas distribution players estimate that the number of new CNG stations in Gujarat could be about 150 by the end of the 2020-21 fiscal. “CNG is 60 per cent cheaper than petrol and 45 per cent cheaper than diesel,” Care Ratings said. “Given the volatility in petrol-diesel prices, more vehicle users are making a shift to CNG-powered vehicles and it is fast gaining prominence as a preferred fuel especially in the case of public transportation.”