India imports less than 1% oil from Russia: Puri
Petroleum and Natural Gas Minister Hardeep Singh Puri told the Rajya Sabha that facts regarding the stand taken by western oil companies on pulling investments out of Russia varied on the ground. Less than 1% crude oil was imported from Russia, he noted. “When we are in discussion with these companies, the facts on the ground vary. Some have indicated an intent and others said they will not make fresh investment. We are monitoring the situation. Insofar as oil imports from Russia are concerned, contrary to what has been played up in the press, these are miniscule. Even now, the total amount contracted will be less than three days’ supply from Russia to India and that also spread over the next three to four months,” he stated. Mr. Puri was responding to Shiv Sena’s Priyanka Chaturvedi, who asked whether the new energy cooperation agreements, including a contract for Rosneft signed in December 2021, may be impacted by the ongoing Ukraine-Russia crisis and whether the exit of British Petroleum from Rosneft impacted the Indian Oil Corporation’s investment. ‘Profitable investments’ Mr. Puri observed that Indian oil companies have invested $16 billion in Russia and some of those investments were very profitable. “For example, Sakhalin-1 where OVL [ONGC Videsh Limited] has a 20% take, the investment of $337 million has led to an overall revenue $3.7 billion and we still have 20 years of assets left. The one facility where one of the western entities is the operator, one of our oil companies has a 20% share. We got worried when we read those reports because if the operator is exiting, then the facility’s production will be undermined. But we were told that no production facilities will continue. So, we will discuss on a case-by-case basis with everyone. We have typical arrangements, which are government to government and company to company,” he said. In the first nine months of the year, India imported only 0.2 % of the requirement from Russia, he remarked. The Minister’s written reply stated that in 2020-21, India imported 85% of its crude oil requirements and 54% of its natural gas requirement. “As per Petroleum Planning & Analysis Cell (PPAC), India’s major sources of crude oil imports are Iraq, Saudi Arabia, UAE, Nigeria and the U.S. Indian Oil and gas Public Sector Undertakings had imported approximately less than 1% of its total crude oil import from Russia in the year 2021-2022 [till January],” it pointed out. When asked by Congress member Neeraj Dangi if the trade with Russia would impact relations with the U.S., Mr. Puri said, “India imported 14 million metric tonnes of crude from the U.S. and this represented 7.3 % of our requirements as against the less than 1 % from the Russian Federation… likely to go up from 14 million metric tonnes to 16.8 million metric tonnes or a value of about $10 billion of imports of crude oil from the U.S. If I add to that the amount of gas that we are importing, and coal, I think the figure comes closer to $13.5 billion of imports from the U.S. So, it is a robust relationship on the energy front, and I see this continuing for some time.”
Who will bear the costs of higher crude oil prices?
Crude oil is one of those external shocks for the Indian economy, the adverse impacts of which are inevitable. According to the Reserve Bank of India’s (RBI) study, a 10 percent rise in crude oil prices weakens India’s real GDP growth by around 20 basis points (bps) over the baseline. Thus, if crude oil averages $100/bbl (or $125/bbl) vis-à-vis the baseline of $75/bbl, it implies a downgrade of roughly 67bps (134bps) to FY23 growth. Brent crude oil prices have fluctuated from $70-80/bbl in late CY21 to its peak of around $130/bbl recently before softening towards $100/bbl now on account of geopolitical uncertainties. Accordingly, we have also revised our forecasts to $80/75 per bbl for FY23/FY24 from $70/65 per bbl earlier. This implies an increase of 15 percent in international crude oil prices, which means a downgrade of about 30bps from real GDP growth next year. Whenever there is any loss in the national output (or income), one or more of the three domestic agents — consumers, companies and/or government — bear this burden. In this note, I recommend the Government of India (GoI) to incur the additional losses, isolating the consumers as much as possible from the current shock. A change in international crude oil price does not lead to an equal percentage change in domestic retail fuel prices. Some components of retail prices such as excise duty per litre and dealers’ commission are static. Therefore, after adjusting for these components, an RBI study finds that the pass-through of international crude prices into domestic retail prices is only around 66 percent, if Oil Marketing Companies (OMCs) pass the whole of international price increase on to the final consumers. Thus, an increase of 15 percent in crude oil forecasts (to $80/bbl from $70/bbl) means 10 percent hike in domestic prices. Assuming full pass-through to the final consumers, a 10 percent hike in domestic fuel prices implies an increase of 45-65bp in the headline CPI-inflation in FY23. This calculation not only includes the direct and indirect impacts of higher crude oil prices, but also incorporates the domestic fuel items such as kerosene, LPG, and other fuels. Thus, this is the maximum likely impact of 15 percent/10 percent hike in international/domestic oil prices on India’s headline CPI-inflation (note: one bp is one-hundredth of a percentage point). Since the weightage of crude oil is much higher in the wholesale price index (WPI) v/s CPI (roughly at 10 percent v/s 4.4 percent), the impact of higher crude prices on the former is more than double v/s that on the latter. Although retail fuel prices, by definition, are market determined, the GoI does play an important role. What else could explain the unchanged petrol/diesel prices since November? It also means that the GoI decides whether the cost of higher crude prices will be borne by the consumers (through higher inflation) or not. If the GoI wants to isolate consumers from higher inflation, then it will have to incur the losses through either higher (fuel/fertilisers) subsidy spending and/or lower excise duty receipts. As a thumb rule, a hike of $10/bbl in crude oil prices implies a worsening of $12-13b (~0.4 percent of GDP) in India’s current account deficit (CAD). If the government incurs the entire cost, fiscal deficit will also widen by the same amount — Rs 1 trillion or ~0.4 percent of GDP. It is very likely that the fiscal deficit in FY22 (ending-March 2022) will be around 6.4 percent of GDP, lower than the revised target of 6.9 percent of GDP (even after including the Third Supplementary Grants asking for additional spending of Rs 1.07 trillion). My calculations suggest that like FY22, the GoI will receive an additional gross taxes totalling Rs 1.7 trillion in FY23. With LIC divestment postponed to next year, even with an assumption of higher devolution (31 percent of gross taxes v/s an average of 29.5 percent in last three years), the GoI’s total receipts could exceed BE by Rs 1.3 trillion in FY23E. Therefore, if the GoI incurs the entire burden of $10 per bbl hike in crude oil prices totalling 0.4 percent of GDP (or Rs 1 trillion), total spending of the GoI will increase by Rs 1 trillion to Rs 40.5 trillion in FY23E v/s the BE of Rs 39.5 trillion. Assuming an additional Rs 0.5 trillion (or 0.2 percent of GDP) on account of some other spending, the total spending of Rs 41 trillion in FY23E implies fiscal deficit of Rs 16.7 trillion next year (6.4 percent of GDP), same as the budget estimates. Therefore, the GoI has the room to isolate consumers from roughly 15 percent hike in international crude oil prices, and take the hit on its own income first quarter of FY23. But, what if crude oil prices remain sticky and average $90/bbl (or worse $100/bbl) in FY23? Well then, the consumers will have to share the burden. Every 10 percent hike in international crude oil prices leads to an additional 30-45 bps increase in the CPI, assuming the complete pass-through.
Wang for Russia-China-India gas pipeline
In the shifting geopolitical landscape post the Russia-Ukraine crisis, Chinese foreign minister Wang Yi is likely to propose a Russia-China-India (RCI) oil/gas pipeline project during his upcoming New Delhi visit later this month. The move is said to have been formulated in response to the US sanctions against Moscow not only hitting the economic interests and businesses of Russia but also hitting India and China hard, top sources privy to the development said. The possible proposition of the RCI Pipeline project comes in the backdrop of the Tajikistan-Afghanistan-Pakistan-India (TAPI) Pipeline not taking off due to security risks posed by a destabilised Kabul and the perennial anti-India stance of Islamabad. The TAPI has been under discussion for nearly three decades. However, India is unlikely to go ahead with any such proposal without gauging the possible impact on domestic audiences as well securing national interests, according to officials. Taking advantage of its sanctions against the Kremlin, the US has been seeking to leverage with New Delhi to further enlarge its defence procurement from Washington which has even threatened India with sanctions under Countering America’s Adversaries through Sanctions Act (CAATSA) for the acquisition of S-400 missile defence systems from Russia, the sources said. However, New Delhi is in no mood to budge and spoil its decades-long strategic relations with Moscow, especially with a firm realisation here that not only American defence assets are costly but investments in technology transfers in India by the US in the sector are low as compared to Russia, they said. During the likely visit of Yi, a proposal of Alternative Payments System (APS) between Russia, China and India to offset the impact of the sanctions against the Kremlin, including the removal of Moscow from the SWIFT payment system, is also likely to come up. Initially, Russia, China and India could be the part of the proposed APS and subsequently more countries can join the grouping, shifting the global order in the process by shaking off the dominance of the American Mastercard and Visa. The three countries have a combined population of nearly three billion out of the global population of 7.9 billion and a corresponding captive market with a sizable consumer base. Counter-terrorism and defence analyst Dr Rituraj Mate said, “China’s proposal of RCI Pipeline Project is based on a double game with Beijing gaining the contract for installation of the pipeline on the one hand and getting royalty from India on the other hand.” “Once the pipeline comes to fruition, oil and gas prices will decrease in India and also improve New Delhi’s bargaining leverage with other energy supplying countries. This will help Beijing in improving its image in India. The pipeline will also increase China’s goodwill in India,” he said. At the geopolitical level, China will get another lever to arm twist New Delhi into submission to fulfil its larger dominance in the region and push global strategic ambitions. Beijing will just have turn the knob of the supply line, squeezing India’s energy needs instantly, he added.
Discounted LNG from Russia to cut costs of importers, users
GAIL India, on an average, imports around 250 cargoes or 14 million tonne of LNG per annum. Higher spot LNG prices have led to a decline in India’s import of the commodity since January compared with the year-ago period. However, with the war in Ukraine and economic sanctions on Russia, the price of Russian natural gas has dropped by over $10 per million metric British thermal unit (mmBtu) or about 29%, presenting a big opportunity for LNG importers and firms across sectors which use natural gas as feedstock or fuel. Companies that FE spoke to see a possibility of imports from Russia going up in coming months given the competitively cheap gas available there. The Russian LNG has turned cheaper than spot rates in major hubs after US and UK banned both Russian crude oil and gas, and shipping lines declined to insure the Russian cargoes. LNG prices are ruling at $39 per mmBtu in Asia. As against this, spot rate at Petronet LNG ‘s Dahej terminal is $35 per mmBtu in India, said Rajesh Mediratta, managing director at Indian Gas Exchange. The cost at Dahej terminal for exchange gas is low because there are various suppliers at different prices, reducing the average price. As against this, the Russian gas will now cost Indian buyers around $25 per mmBtu. The low Russian gas prices will allow Indian companies to ramp up inventories and cut losses caused by high spot prices over the last ten months or so. LNG terminals in Dahej and Hazira in Gujarat are underutilised after imports declined by 10.6% on year in January 2022, and over 3.2% on year in 10 months since April 2021. GAIL India, which is the largest importer of natural gas in the country already has a long-term contract with Russia for 2.75 million metric tonne per annum (mmtpa), which it plans to raise to 3 mmtpa soon. India received its first gas cargo from Russia’s Yamal project in October 2021. “There is a possibility that GAIL will look at discounted LNG from Russia to meet its short to medium term requirement,” said a source. A query to GAIL did not elicit any response till the time of going to press. GAIL India, on an average, imports around 250 cargoes or 14 million tonne of LNG per annum. It has a 5.8 mmtpa LNG contract with US suppliers that is linked to the US gas market Henry Hub. It also sources 4.8 mtpa of LNG through Petronet LNG on long-term contract from Qatar, and another 0.4 mtpa from Gorgon in Australia. India’s LNG imports had fallen in January due to higher international prices and a rise in domestic production. LNG imports fell 10.8% over a year ago to 2,408 million standard cubic meters in January, according to data released by the Petroleum Planning & Analysis Cell. Excluding the 1,640-mmscm imports in the pandemic-marred April 2020, it’s the lowest in 32 months. The international prices have been rising for the past few months on low storage inventories and higher winter gas demand. The rally was fuelled after Russia invaded Ukraine, causing uncertainties over gas supply to central Europe. While spot LNG prices, as measured using the Japan-Korea Marker, have retreated from a high of $51.8 an mmBtu in the first week of March, they are still elevated at around $35-$37 per mmBtu level. The Institute for Energy Economics and Financial Analysis said, ‘gas/LNG has neither been affordable nor available’. The institute, in its January report, raised concerns about LNG price volatility as it can increase operating costs of downstream projects in the industrial, power, and city gas distribution sectors. High spot LNG prices have already started to affect several sectors dependent on gas. Many have shifted to alternative fuel like Naphtha and coal. “Sourcing competitively priced Russian LNG will definitely aid the current demand scenario,” said another official.
Saudi Arabia Remains China’s Top Oil Supplier Despite Deep Russian Discounts
The world’s largest oil exporter, Saudi Arabia, was once again the top supplier of crude to the world’s top importer, China, beating its partner in the OPEC+ deal, Russia, to the top spot for deliveries in January and February 2022. Chinese crude oil imports from Russia fell by just over 9 percent in the first two months of this year, per data from China’s General Administration of Customs cited by Reuters, as independent refiners reduced purchases of crude, including of one of their favorite blends, Russian ESPO, due to lower quotas and a crackdown on illicit practices from the Chinese authorities. Going forward, it is not clear how much Russian crude China will import, considering the fact that China isn’t shying away from Russia’s energy as most of the rest of the world has already done following Putin’s invasion of Ukraine. However, some large Chinese state-owned banks have halted the issuance of dollar-denominated letters of credit for physical Russian commodities purchases. Being unable to secure such letters of credit, some independent refiners, the so-called teapots, have reportedly started looking for alternatives. On the other hand, China has generally not followed Western sanctions – as is the case with Iran – so it’s likely that it could see an opportunity to snap up heavily discounted Russian crude. In January and February, Russia was superseded by Saudi Arabia as the top Chinese oil supplier, after Russia was the biggest supplier of crude to the world’s top importer in December 2021. China’s imports from Saudi Arabia averaged the equivalent of 1.81 million barrels per day (bpd) in the first two months of 2022, down by 3 percent year over year, per Chinese customs data in tons converted into barrels by Reuters. Imports from Russia stood at 1.57 million bpd, down by 9.1 percent annually, as Chinese teapots reduced overall imports. That’s because Chinese authorities granted at the end of last year 11 percent lower crude import quotas to independent refiners in the first batch of quota allowances for 2022. The government, intent on reforming the independent refining sector and cracking down on tax evasion and illicit practices at the teapots, is now allowing its independent refiners to import 109 million tons of crude oil in the first batch for 2022, down by 11 percent compared to the first batch of quotas granted for 2021. The three biggest private refiners in China—Zhejiang Petrochemical, Hengli Petrochemical, and Shenghong Petrochemical – together accounted for around 38 percent of all first-batch import allowances, a document seen by Reuters showed. This suggests that China is now favoring giving quotas to the newer and more sophisticated private refineries as it cracks down on smaller and more polluting independent refiners, some of which are being investigated over alleged irregular tax and trade practices. In the coming months, however, China could turn to more barrels of Russian crude at hefty discounts, which could make Russia a top supplier of crude to the world’s top oil importer again. Some Russian oil producers are reportedly selling crude to China without bank guarantees. For example, Russian oil firm Surgutneftegaz continues to sell its oil to Chinese buyers even without bank guarantees, from which many banks have pulled out after the Western allies kicked several Russian banks out of the SWIFT system, Reuters reported exclusively earlier this month, quoting three sources familiar with the matter. Oil traders are staying away from Russian crude after the Western countries banned selected Russian banks from SWIFT, while Russian producers have not been able to sell their spot cargoes in tenders in Europe because no one is bidding. But in China, the trade continues, as Surgutneftegaz is now allowing Chinese customers to take oil without providing the bank guarantees, the so-called letters of credit, according to Reuters’ sources. China will likely be unable to take all the crude that Western buyers and traders are shunning right now, but it will likely take advantage of discounted Russian barrels when they become available.