Opinion

‘Refining’ India’s oil purchasing strategy

Richa Mishra | Updated on October 30, 2021

Oil issues The government’s new initiative will hopefully bring succour to consumers   -  SUSHIL KUMAR VERMA

A consortium of buyers can go a long way in planning the requirement and working out the logistics

If the rising fuel prices are creating a hole in the consumer pocket, it is also denting the country’s trade balance, as over 85 per cent of the country’s crude oil requirements are met through imports. To reduce the import bill, the government is looking at bringing together the domestic refiners — both public sector as well as private players — to strategise and negotiate with the oil producers.

The oil import bill for September stood at ₹68,932 crore, up from ₹67,260 crore in August, and if one goes by the global oil prices in October then the bill could be higher in this month. The price at which Indian refiners bought their crude in September stood at $73.13 a barrel and in October this is expected to be higher.

International crude oil prices have been consistently surging in October 2021, with an increase of around $10 a barrel in average prices compared to September. During the last two weeks, prices have been trading at around $85/barrel levels.

The recent spike in prices has been linked to the rising expectations that some countries will respond to shortages in coal and natural gas by switching to crude derived products for power generation and heating. This is likely to boost global oil demand, further adding to the supply deficit prevailing in the international crude oil market.

The country’s crude oil import during April-September 2021 stood at 100.9 million tonnes. The top five suppliers were Iraq (24.7 million tonnes), Saudi Arabia (15.7 million tonnes), UAE (9.9 million tonnes), the US (eight million tonnes) and Nigeria (7.99 million tonnes). Iraq has been topping the chart since 2017-18.

At the recently concluded India Energy Forum CERAWEEK event, Minister for Petroleum and Natural Gas Hardeep Singh Puri was quoted as saying that Secretary in the Ministry, Tarun Kapoor, has already met the domestic players and all seem to be enthusiastic about the prospects of bringing together the refiners.

This is not for the first time such an effort is being made. The Standing Committee on Petroleum & Natural Gas (2013-14) on the issue of long-term purchase policy and strategic storage of crude oil report had said, “…Instead of all oil PSUs carrying out purchase of crude oil, the Committee recommends for the formation of a joint venture company promoted by all interested PSUs and entrusted with the work of importing of crude oil required for them in line with their refining specifications.”

The Committee had also said that this company may be given enough flexibility enjoyed by private sector refineries to carry out their operations including price negotiation, hiring of ships and negotiate better terms on freight etc. which will help PSUs save work relating to imports.

Bringing together

This time the government is attempting to bring all refiners — both public sector as well as private players — together. Initially the group will meet once a fortnight and exchange ideas on crude purchases. Kapoor had said, the refiners can form joint strategies and even do joint negotiations wherever they are comfortable.

According to Kapoor, the government will just facilitate making of a consortium, but its functioning will be in the hands of the players. Basically, there will be no direct involvement of the government. The deals will be struck by the players with the producers.

Therefore, the question is will it work if the government is not directly involved? According to industry players, if the government is involved then the contracts can have a force clause too — which will talk about penalty if contract not honoured or what can be the base price.

The Standing Committee had also noted that till July 1998, the entire requirement of crude oil imports was canalised through Indian Oil Corporation (IOC), the sole canalising agency. Thereafter, the crude oil import was decanalised and private and joint sector refineries were allowed to procure their own requirement of crude oil. Import of crude oil was further decanalised from April 2002, with all PSU oil companies being permitted to import crude oil independently to meet their refinery configuration through term-contracts and spot tenders in accordance with the guidelines issued by the Ministry.

Purchase of crude oil is a complex process which involves negotiations of contract floating of tenders, shipping arrangements, unloading at ports, transporting to refineries etc, refinery complexity and most importantly the discounts offered by the sellers.

Strength in numbers

The latest concept being proposed by the government is that with this combining of forces by forming a group or a consortium or a structured body, can help the entities analyse together the data of the country they want to import from, understand the procurement requirements and then order together. However, the commercial agreements or deals will be independently struck by the refiners as the purchase order will be separate.

After all the objective of all refiners are the same, everyone wants a reasonable price in commercially conducive conditions. But, one must remember that there is a marked difference in the way private players negotiate and buy their crude oil requirements vis-à-vis their public sector counterparts.

It is an accepted fact that private sector refiners have more flexibility in their crude sourcing mechanism. For example, they can also purchase distress cargo, which a public sector entity cannot because of the stringent norms which they have to follow. Besides, each company has its own procurement strategy which they may not like to share with the competitor.

This proposed concept may work for the term deals, instead of working in silos the players can join forces, with a stronger bargaining power, as today, crude forms almost 90 per cent of the refiners’ cost.

The concept is still at a nascent stage, and nuances of terms of reference and how it will operate has to be worked out. Yes, like suppliers have a group, it is time buyers too worked together. But, it has to test waters by forging a successful deal, before it can be judged.

 

Published on October 29, 2021

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