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| Reliance, Essar not to buy Cairn crude |
| Press Trust of India / New Delhi May 22, 2009, 14:37 IST |
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Reliance Industries (RIL) and Essar Oil (EOL) may not buy crude oil that Cairn India will start pumping from Rajasthan in the next few weeks as they say the oil was priced higher than its intrinsic value.
RIL and EOL had wanted a minimum 30,000 barrels per day (1.5 million tonnes a year) each of Rajasthan crude but have been put off by the pricing agreement Cairn has reached with state-run Indian Oil Corp, the principal buyer, sources said.
Cairn is to sell 1.9 million tonnes oil to IOC in 2009-10 and next year at a discount to Nigerian Bonny Light crude.
The discount at current oil prices works out to about 11 per cent while RIL and Essar expect a minimum concession of 15 per cent considering the fact that Rajasthan crude does not have LPG and turns solid at normal temperature, they said.
Cairn wants to price the crude taking taking three year average of Bonny Light which comes to $75 a barrel while current rates were about $20 lower. The discount as per the pricing formula at $75 work out to about 16 per cent.
The government has found in IOC, Hindustan Petroleum and Mangalore Refinery buyers of only 2.6 million tonnes of the 8.75 million tonnes peak output planned by Cairn India by 2011 and it may necessarily have to be sold to private refiners.
A Cairn spokesperson declined to comment.
Sources said Cairn was yet to arrive at an agreement on pricing with HPCL and MRPL.
Sources said the contract for Cairn's Rajasthan block has no mention of what reference price -- current price or yearly average -- should be taken for arriving at sale price.
According to formula agreed with IOC, the discount would be the difference in Gross Product Worth (GPW) between the premium Bonny Light and crude from Mangala field in Rajasthan. On top of it, a 2.14 per cent concession would be allowed for higher pour point and viscosity of the Cairn crude.
GPW is the fuel a particular grade of crude can produce.
Sources said Cairn does not want to give the 2.14 per cent or $1.7 a barrel on $75 per barrel three-year average price of Nigerian Bonny Light, to MRPL.
Mangalore Refinery and Petrochemicals, a subsidiary of Oil and Natural Gas Corp (ONGC), not only wants the 2.14 per cent discount but also wants to be compensated of the ocean freight it has to pay for transporting crude from Gujarat coast to Mangalore.
Mangala crude cannot produce products like LPG and so the GPW differential or discount at $75 a barrel price comes to around 14 per cent while the same at current rates was just 9 per cent, the said.
Additionally, crude turns solid at normal temperature and is viscous and so a further discount of 2.14 per cent has been given. The final price to IOC would be 16.14 per cent discount to $75 a barrel - the three-year average of Bonny Light crude, sources added.
Sources said currently there was a very small differential between the light crudes like Bonny Light and so-called difficult and heavy crude like the one Mangala field would produce.
This was because typically during low price regime oil cartel OPEC cuts down output of difficult crude which command less price. And when prices rise, which may happen by next year, the Mangala-kind crudes would be available at a heavy discount to grades like Brent or Bonny Light.
RIL had wanted 30,000-60,000 bpd of Cairn crude for each of its two refineries at Jamnagar in Gujarat, while EOL had applied for 30,000 bpd this year and 1,20,000 bpd by 2011 when it expands its Vadinar refinery in Jamnagar.
Cairn has said it will be ready to produce crude oil from its Rajasthan fields this month with output seen at 1.5 million tonnes in the fiscal 2009-10.
IOC would take just 0.3 million tonnes while HPCL and MRPL would take 0.4 and 0.2 million tonnes, respectively. Next fiscal when production rises to 3.5 million tonnes, IOC wants 1.5 million tonnes, HPCL 0.5 million tonnes and MRPL 0.4 million tonnes.
If private refiners refuse to buy the crude, Cairn may be allowed to export. But exporting the crude may not give the firm the price it is commanding from domestic refiners due to the freight cost that would add for the oil to be shipped all the way to China, the only nation in this region which processes Mangala-kind of crudes.
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