Crude scenario: Indian refiners to benefit if Iran oil opens for trade

If US and UN sanctions ease, Iranian crude could return to Indian refineries, offering a cost-effective alternative as Russian oil flows shrink

All it took was an executive order by Barack Obama, then American President, on January 16, 2016, lifting sanctions on Iran over its nuclear programme, for Indian refiners to press the pedal, doubling imports of crude oil in 2016-17 from a year earlier to 545,000 barrels per day (bpd), illustrating the appetite among Indian refiners for Iranian oil grades. 

Iran in FY10 was India’s biggest supplier of crude oil after Saudi Arabia, but the sword of United States (US) sanctions and uncertainty over supplies led to Iraq displacing Iran in FY17, relegating Iran to third place, with imports grounding to a halt from 

June 2019. 

The appetite may return soon if the United Nations (UN) and the US open Iranian oil for global trade, just as US President Donald Trump did with Venezuela earlier this month, senior refining sources and analysts said. 

It could also open a window for Indian refiners after Trump closed the door for Russian oil supplies to India, especially when India's oil demand is growing by 3-4 per cent and import dependency has increased to 90 per cent, the oil ministry data showed.  Reliance Industries, which was India’s biggest buyer of Russian oil, has said it has stopped buying, and overall flows collapsed by nearly a third in January from November, the data from Kper, a market-intelligence agency Kpler data showed. 

“Iranian oil is a natural fit for Indian refiners because it is essentially a ‘classic Middle East sour’ barrel that India has processed extensively in the past,” said Sumit Ritolia, analyst for Kpler, who in the past has sourced Iranian crude oil for an Indian refiner.

 

Light/heavy Iranian grades had proved to be a goldmine for Indian refiners in the past, offering one of the best values and may prove so again if the ongoing protests in Iran culminate in a peace accord, sources in the refining industry said. It is also a short haul compared to paying high freight costs to shipping similar grades from the US, Brazil or West Africa. 

Flows from Iran trickled to a halt in May 2019 after then US Secretary of State Mike Pompeo announced in the previous month that the US would stop providing sanction exemptions to countries that imported Iranian oil. Of the eight countries that received exemptions, which expired May 2019, seven, including India, stopped imports. A government official said India abided by sanctions of the UN, and unlike Russian oil, which is not sanctioned, Iranian oil is barred for import. 

Iran peak 

Shipments of Iranian oil to India peaked in FY17, a year after Obama relaxed the sanctions. Iran has supplied 273,000 bpd in FY16. 

“Indian refineries were generally designed for oil from West Asia and Iranian light and mix are varieties which generally create a higher value for the desired product (fuels) mix,” said R Ramachandran, former refinery director, Bharat Petroleum, who has processed Iranian grades. Iraqi oil, consisting of Basrah Medium and Basrah Heavy, was the most competitively priced oil in November, averaging $64.50 a barrel on a delivered basis, $1.50 per barrel cheaper than Russian oil, the Indian customs data showed. Like other Gulf grades, Iranian crude oil is also pegged to the Oman/Dubai benchmark, a peg for oil supplies from Saudi Arabia, India’s third-biggest oil supplier. 

Iranian benefit 

Stating the gains from Iranian oil, Ritolia said Indian refiners had understood the yields and operating behaviour of Iranian oil. “Beyond pricing, Iranian oil also offers strong logistical value: For refiners on the west coast it is a short-haul supply option, enabling a shorter voyage time, faster procurement cycles, and lower freight and working-capital exposure versus longer-haul alternatives such as the US Gulf Coast or West Africa,’’ Ritolia said.