The Hindu Business Line : Asian oil diplomacy initiative

Petroleum purchasing and selling nations met in Delhi last week to forge an Asian market for crude and products. Discussions centred on the possibility of a price band for Asian countries, besides changing the nature of the crude purchase contracts. In this regard, India is being noticed, but there is still a long way to go, says S. Narayan.

THE assembly of petroleum purchasing and selling nations in Delhi last week was the first ever effort to forge an Asian market for crude and products. The Union Petroleum Minister, Mr Mani Shankar Aiyar, has indeed to be complimented on this effort to combine energy, commerce and diplomacy into a strategy for oil security.

The principal Asian consumers — Japan, China, India and Korea — attended the conclave, as also producers including Saudi Arabia, Kuwait, United Arab Emirates and Iran. The Saudi Minister pointed out that 60 per cent of his country's production was sold to Asia, and that Asia had become their No.1 customer.

There was, naturally, a multipoint agenda. The first was an attempt to find approaches to mitigate price volatility. The fluctuations in oil price of 2004 have demonstrated that the official OPEC (Organisation of Petroleum Exporting Countries) price band for crude has been observed more often in the breach than in its maintenance.

There is already talk of revising the price band upwards, given the growing demand and relative uncertainties in increasing supplies. Discussions in the conference centred on the possibility of a price band for the Asian countries, where there would be an informal commitment to honour, rather than allow the band to be breached, in respect of these buyers.

There was also discussion on changing the nature of the crude purchase contracts. Traditionally, the public sector oil companies in India enter into annual contracts with the national oil companies of producing nations.

This approach has been adopted to ensure that there are no intermediaries, and that the price contracted is transparent. However, these are annual contracts and require to be renewed. There have been instances of non-supply, with very little possibility of enforcing defaults.

This occurs because there is a huge spot market for crude, and consists of considerable quantity of supply that is outside the purview of the national oil companies. These include production of multinationals, of countries where production monitoring is poor, uncontracted and unreported production.

Real production figures of crude are notoriously hard to come by, and the estimate of daily output of around 83 million barrels is just that — an estimate. These lead to a large trader market and to futures and forwards. The daily trade in Dubai crude is over four times the production, indicating the volatility of the market.

It takes two-and-a-half days for a shipment that leaves Dubai to reach the Indian shore, and the consignment probably changes hands four to five times.

The spot market in fact creates artificial scarcities and surpluses, which the annual contracted quantities are not able to smooth out. In a period of high prices, there is thus a tendency to welsh on contracted supplies.

The problem of long-term agreements is, therefore, first the problem of predicting prices and, more important, the volatility caused by the spot market. Parliamentary accountability and government procurement processes require Indian companies to be conservative in their procurement processes and, hence, they are often unable to take advantage of the fluctuations in the market.

It was clear at the end of the discussions of the conclave that, to address this problem, India has to take a view on handling the spot market in a transparent, accountable manner.

One approach to this could be for Indian oil majors to be more aggressive on the futures and the hedging market. Permission for this was given three years ago, but it is not clear whether even the largest of the majors, IOC, has developed international class expertise in-house for this, or indeed, has the stomach for what is considered a risky business.

The suggestion for the creation of an Asian oil market, on the argument that Asian economies account for 35 per cent of the world's oil consumption, as a first move towards developing an Asian market for petroleum and petroleum products, was an approach to tackle this problem.

Western economies have developed their own markers: The Western Texas Intermediate for US markets and the Brent for European markets.

There is also the Dubai crude marker for Gulf production, and these markers have acted as the benchmark price against which crude is bought or sold. Asian economies have to depend on these markers, and the prices to Asian countries are either a discount or a premium to marker prices.

The problem is that Asian purchasing markets are neither as organised as the European and the American markets, nor are the processes uniform or market-oriented. China and Japan traditionally are reticent to divulge details about sourcing and prices.

Oil being a strong vehicle for foreign policy, these countries strategise other economic advantages along with crude trade. There is as yet neither coherence nor uniformity of approach among the Asian buyers to signify the maturity of the market — and this is exactly what the producing nations had to say at the Delhi conclave.

Notwithstanding that, this is the first time that the suppliers have voiced their concern and mooted this idea, and since oil is a very close community, the ripples from these discussions are likely to be quite significant — again a feather in the cap of the Petroleum Minister.

Another attempt was to expand equity oil overseas. China is aggressively investing in oilfields overseas, and India has also started to do so. It is possible that the meting would have, on the sidelines, created greater awareness of the seriousness of the Indian players, and, going ahead, there may be opportunities in both oil and gas.

The real weakness is that oil is not a competitive market. Suppliers have been able to influence quantities and supplies, errant countries notwithstanding, for over thirty years now. It is a commodity that consumers cannot do without, and producers are well aware of this. This is an inherent weakness in the bargaining position of the consumers that they have nothing to offer in return.

Unless the bargaining position is strengthened through other diplomatic strategies, it is unlikely that the conclave of consumers would be able to influence the market behaviour of the producers.

Most important, this meeting demonstrates the need to be economically strong. The bargaining position of China is very different from what it was ten years ago. India is being noticed, but there is still a long way to go. There is no substitute for being recognised as an economic power.

It is important that this initiative in the petroleum sector is not seen as a single effort in isolation, but is part of a series of coherent, well-strategised moves that include seeking advantages in commerce, commodities (especially gold), and services. We have seen other countries adopting a coherent external economic policy; it is time for India now to get its act together.

(The author is a former Secretary, Union Ministry of Petroleum and Natural Gas.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Unclear still on ADC

Asian oil diplomacy initiative

Himalayan siege

Patents Ordinance 2004 — Relief for generic drug-makers

The FII fest in India's stock markets

IOC clarifies