Price, not distance, will be the key for crude oil purchases from US

Crude oil imported from America is not cheap and a charter from the US takes 40-45 days to arrive in India as opposed to the 5-10 days from the Gulf. Yet, there is a push to buy US crude oil as it is expected to bring down the trade imbalance between Washington and New Delhi.

Sanjiv Singh, Chairman, Indian Oil Corporation Ltd, says: “US crude is compatible and comparable. US-origin crudes are purchased through spot tenders on competitive bidding.”

Says Narendra Taneja, an energy expert: “Importing crude from the US is as viable as buying from Latin America or West Africa. It all depends on the price and other terms and conditions. We have been importing crude from Venezuela, which is about the same distance from India as the US.”

Says Vandana Hari, Founder of Vanda Insights: “If you leave politics out of it, a refiner will always go by two main considerations when buying crude: Does it suit the refinery and is optimal for the desired products slate? And, is it economical, vis-a-vis competitive crudes?”

US crude costs Indian refiners more relative to other similar light, sweet grades from West Africa, the North Sea or Asia, she says, adding: “Higher freight cost is a factor. So is the additional reverse-lightering charges, as you cannot fully load a VLCC directly at US ports other than the Louisiana Offshore Oil Port.”

Explained IOC’s Singh: “There are infrastructure limitations at the US-end, including limitations in moving crude oil from onshore production sites to the coast as well as limitations at ports. With infrastructure debottlenecking at the US-end, US crude oil should become more attractive for Indian refiners. With controlled clearance from the Shipping Ministry on CIF (Cost, Insurance and Freight)/DAP (Delivered At Place) basis, the option of crude oil transportation has also widened.”

As US crude production continues to surge, the pressure for the barrels to leave the country will correspondingly rise, said Hari, adding: “We have seen the trend through this year. It also creates a downward pressure on US crude prices, and leads to rising exports.”

Purchase yardstick

IndianOil is mostly buying American crude oil against spot tenders. It has bought only once on contract. But the purchase is purely based on pricing. “Whatever pricing they do, we compare with our own benchmark. The purchase yardstick has to be the same. We convert the rates to our benchmark and then decide,” said an official involved with the trading.

The Indian crude basket — the price at which domestic refiners buy their crude oil — is the weighted average of Dubai and Oman (sour) and the Brent crude (sweet) prices.

“The US will emerge a big gas exporter within the next few years. Importing from the Middle East and East Africa would make more sense, but I would say we should diversify supplies from various continents in the interest of energy security,” Taneja added.