India's fraying Gulf oil ties get a fillip on US' sanctions on Russia

State-run refiners plan to renew or enhance optional volumes under existing contracts, struck on a fiscal basis, despite higher sourcing costs

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Bharat Petroleum has secured 3.8 million tons and Hindustan Petroleum around 5 million tons, two refining sources said. (File Image)
S Dinakar Amritsar
4 min read Last Updated : Jan 19 2025 | 11:40 PM IST
Even as Indian refiners were completing a series of meetings this month with West Asian suppliers of crude oil to discuss term-contract renewals for 2025-26, amid growing uncertainties over the fate of Russian supplies, one thing stood out: As an industry veteran remarked, “You can buy cake, you can buy sweets, you can buy anything, but Saudi Arabia is bread and butter crude oil.”
 
That pretty much explains why state-run refiners, which were planning early to trim term contracts with Saudi Arabia because of higher prices, especially after getting discounted Russian oil in their facilities, have reversed their stance and will retain the existing contracts and perhaps seek a bit more when Saudi Aramco comes calling on January 22, industry sources said.
 
Indian state-run refiners now plan to renew or enhance optional volumes under existing contracts, struck on a fiscal basis, despite higher sourcing costs of $4-5 per barrel, because of the reliability of West Asian oil producers, industry sources said. There were meetings on contract extension with Kuwait on January 10 and the United Arab Emirates (UAE) on January 17.
 
Term contracts typically comprise a firm volume and optional purchases.
 
“Unless Donald Trump (as United States President) reverses the latest sanctions against Russia, Indian refiners have little choice but to buy more West Asian crude oil and bear higher costs, at least for the time being,” said Vandana Hari, a Singapore-based energy expert. “But they may not necessarily increase term volumes in West Asian contracts.”
 
Iraq, which contracts on a calendar year, has already announced its allocations, retaining last year’s volumes, industry sources said. Indian Oil, the country’s biggest refiner, has retained its annual crude oil import deal for 2025 with Iraq at 20 million tonnes for 2025.
 
Bharat Petroleum has secured 3.8 million tons and Hindustan Petroleum around 5 million tons, two refining sources said.
 
Other producers are yet to make term allocations. State refiners source around 25 million tons a year in term supplies from Saudi Arabia. Kuwait supplies around 4 million tons a year and the UAE more than 13 million tons, refining sources said. Optional volumes mean Indian refiners have a choice to buy them if prices are competitive or seek alternative, cheaper grades from the spot market.
 
State-run refiners may increase purchases of optional volumes, a component of term contracts, and spot volumes from West Asia this year after American sanctions on Russian oil flows last week crippled transportation, refining sources said. A top state-run refiner sourced around 2 million barrels of the UAE’s Murban grade at a $4 premium to benchmark Dubai — with over 5 million barrels of Gulf volumes in stages of contracting to meet India’s shortfall in February and March, a senior trader said. More tenders are expected. 
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In 2018, 61 per cent of India’s barrels of crude oil came from the Gulf, according to the data from market intelligence agency Kpler. That shrunk to as low as 41 per cent last year but is expected to increase this year. The reduction in West Asian volumes was significant after Russia flooded India’s oil market since it invaded Ukraine in February 2022, offering discounts initially of over $15 per barrel. These discounts have shrunk to less than $3 per barrel now.
 
Moreover, Saudi Arabia and the UAE are important for India because they remain the only investors ready to take stakes in refining projects in exchange for a commitment to buy crude oil from them, refining officials said. Indian state-run refiners lack the financial heft or an appetite for risk for spending billions of dollars on greenfield refineries, which come with a short shelf life as the world transitions to clean fuels. Adding these limitations to state oil-marketing companies, stripped of their power to price fuels, makes them even more dependent on Gulf oil producers for investment. 
 
Saudi Arabia and India are in talks on taking a substantial stake in Bharat Petroleum’s proposed greenfield refinery-cum-petrochemicals project in Andhra Pradesh.
 
Recounting an incident that happened when Indian refiners were in talks with Saudi Aramco over a stake in the now shelved Ratnagiri refinery project (60 million tons a year), an informed source quoted a top Aramco official saying that “Saudi Arabia is the one who will be standing by India, because we have the volumes. And we are close (geographic proximity) to you. The US or Venezuela may have more resources, statistically, but you lose on freight. Second is the range we offer — offering from super light all the way to Arab heavy. Others will give you some crude oil but not all grades.”
 

Topics :Oil refineryCrude OilOil productionUS sanctions

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