Saudi oil attacks: Logistics cost a concern as India looks to Russia, US

Last week’s twin attacks on Saudi Arabia’s oil infrastructure led the Indian government to speed up talks with Russia and the United States — two nations that made it to the list of energy partners in the past five years.
 
On Tuesday, Petroleum Minister Dharmendra Pradhan met Russian oil giant Rosneft’s Chief Executive Office Igor Sechin and discussed raising crude imports from that country, in addition to talks about going for more acquisitions.
 
This comes at a time when of the $5.8 billion worth of hydrocarbon assets acquisitions made by Indian companies abroad in the last five years, $4.85 billion was in Russia.
 
At the same time, after importing the first crude oil cargo from the US after 42 years in October 2017, India has been targeting at least $2 billion worth of crude oil shipments per annum from the US market too.
 
According to officials, the oil marketing companies — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — are already working on “contingency” plans in case of a supply shortage from Saudi Arabia.

“We have assured supply from Saudi Arabia till the end of September and hence availability of crude may not be a cause of concern till October-end. After that, things will depend on how fast Saudi Arabia is going to restore production,” said a government official.

However, can Russia and the US replace Saudi Arabia, which contributed around 18 per cent (40.3 million tonne) of the country’s total crude oil imports of 226.6 mt in 2018-19?
 
“Both Russia and the US should be seen only as a long-term prospects. Immediately, it is unlikely to be an alternative for Saudi Arabia. Since our crude basket is wide, supply is unlikely to be an issue for India,” said Deepak Mahurkar, partner and leader (India oil and gas industry practice) at PwC.
 
For the current financial year, IOC has already entered into two term contracts of around 4.6 mt from the US — including 3 mt with Norway’s Equinor and 1.6 mt with Algerian state energy company Sonatrach.
 
India is likely to increase its Russia imports, which was 2 mt last year. But this may not be easy, considering the higher transportation cost from the US and Russia. “Compared to brent crude, the US crude (WTI) has a price advantage of $6-7 a barrel. However, it is light crude and not all refineries will be able to replace it. With Russia, their exportable surplus may not be that high,” said K Ravichandran, senior vice-president and group head - corporate ratings, ICRA. He added that both these countries are important sources for India to diversify into after supply from Iran and Venezuela is nil and Libya too is having issues related to supply disruptions.
 
A major concern is the high cost of shipping. “To deal with this, refiners have active hedging practice in place – including hedging track spread and crude pricing risk as well,” Ravichandran added.
 
Retail prices continued their upward curve, touching Rs 72.71 a litre for petrol and Rs 66.01 a litre for diesel in New Delhi on Thursday. “We expect hikes to continue because international prices will rise over the next 15 days (retail prices are based on 15-day moving average).
 
Net auto fuel marketing margin is at Rs 1.45 a litre on September 18 based on September 16 refinery transfer price, but at Rs 0.55 a litre  if marked to market,” said a report by ICICI securities.