India's energy alliance with Saudi totters after years of co-operation

India is the third largest market for Saudi crude. But after a year of Covid, the latter isn't keen to let prices hover at under $80 a barrel, the break even at which its budget wipes off red stainsi

After almost agreeing with India to become a strategic partner for oil security, Saudi Arabia has walked back some distance. This is surprising after the level of cooperation the two countries had begun to demonstrate in the past few years. 

For India this reduces some of its options to build energy security in the economy as the plumbing for its growth strategy. In several episodes in the past, India’s growth has sized up as oil prices suddenly skyrocketed. 

The strategic partnership India had offered Saudi Arabia was to fill one cavern at Padur reserves. The union cabinet had approved a proposal to offer a 2.5 million tonnes of capacity at the second phase of the project being built by Indian Strategic Petroleum Reserves. In the first phase, UAE’s ADNOC had filled up one cavern emptying out its reserves from South Korea. ADNOC was offered the tax exemption to use the reserves and fulfil its commercial commitments in the country from the reserves. Two years after the offer was made in a MoU when Prime MInister Narendra Modi toured Saudi Arabia, it is yet to respond. 

The partnership gave India the financial space to fill up the reserves on a public-private-partnership mode without having to pay from the budget for them. 

Instead, relations dived low this month when Saudi Arabian energy minister AbdulAziz Bin Salman offered an unsought for advice to his Indian counterpart Dharmendra Pradhan to use oil from those same reserves bought “cheaply” last year. Pradhan termed the comments “undiplomatic” marking a low from the bonhomie reached in 2019. Saudi Arabia had also agreed to offer the oil at low prices for the cavern since demand was not picking up in other markets.  

At their best, the Saudis had set up two offices of Aramco in India. Aramco Asia India’s office in Gurugram was opened in 2017 by the company president and CEO Amin H Nasser, complementing the older trading office it already had in India. Since then the Kingdom wanted India to also participate in the initial public offer of Aramco, which India passed up. The West Coast refinery project in Maharashtra in which Riyadh was quite keen on has also passed into limbo on land acquisition challenges. 

Yet India does constitute the third largest market for Saudi crude, about half of what China imports. But after a year of Covid, the Saudi government is not keen to let prices hover at less than $80 a barrel, the break even mark where its budget wipes off its red. It also ensures Aramco is able to stay attractive to its shareholders. Hence its reluctance to let oil production by the OPEC expand and cool down the prices globally, something India would like to happen. 

On an average, each year India’s oil companies buy $100 billion of oil. It is a fat bill of about a sixth of the country’s foreign exchange reserves. With domestic consumption expected to rise from the current 214 MMT to over 300 MMT soon, the sum is likely to expand far more. At prices above $60 a barrel, the economics becomes difficult for India. The tussle has also become somewhat intense as India is not willing to let international prices dictate terms. 

So the two almost strategic friends are now well and truly in opposite camps. In the past two months Indian oil producers are scouting for supplies from as far afield as Latin America. Last week for the first time, India sourced its first ever oil cargo from a new oil producer Guyana in Latin America. The buyer was joint venture, HPCL-Mittal Energy. State run Mangalore Refinery and Petrochemicals Ltd too has for the first time bought a 1 million barrel consignment of Brazilian Tupi crude oil. In February India imported more oil from the US and Nigeria than Saudi Arabia and Iran. After being at the top for some time, Saudi Arabia has shifted to fourth position. 

The other option India is trying out almost for the first time is to encash its oil equity. India has 27 overseas oil and gas assets. Only a few of them are in producing blocks, though. The shareholding in almost each of them includes an option for the Indian partner to buy the fuel at predetermined prices. 

The prices should in theory be lower, except due to lack of capacity in the Indian oil establishment to build up information about the blocks, many of them have a capital structure where the upside for the Indian partner is limited. Still there has been some progress. Production from the overseas oilfields doubled in five years to 24.7 million metric tonnes of oil equivalent in FY19. 

An even better option could be for the Reserve Bank of India to relax its rules on which banks can sell forex to oil companies for their purchases. As the volumes are massive, compared to any other demand by importers, historically and also because of the taper tantrum of 2013, the RBI has only allowed the big domestic banks to do the trade, even though all AD Category -I banks are eligible. For instance at the height of the forex crisis the regulator opened a dedicated swap window for the oil companies. In normal times the RBI also allows the oil companies to hedge their exposures  of upto 50 per cent of the volume of actual imports during the previous year or 50 per cent of the average volume of imports during the previous three financial years, whichever is higher. 

It works. There has been some relaxations too. In 2018 RBI allowed oil companies to raise loans for their working capital requirements from abroad directly instead of from the RBI. For buying oil there is a need for a larger relaxation. The Indian domestic banks do not have their own counter party abroad. As a result the oil importers buy the forex at rates of interest which are higher than the available rates in global markets and also hedge at higher rates. Given the size of the business, it might make sense to allow this arbitrage window to be also opened. It could take off some of the pressures from the oil markets and give India the room to ease inflationary pressures within and take on the big sellers of oil, abroad.