Finance Minister Nirmala Sitharaman during a recent visit overseas was quoted as saying that New Delhi could buy Russian crude oil near or above the price cap imposed by the G-7 if the recent OPEC+ output cut increases energy costs.

Back home, recently, Pankaj Jain, Secretary, Ministry for Petroleum and Natural Gas, said some Russian crude was purchased by Indian refiners above the price cap imposed by G-7. According to the Secretary, most of the Russian crude purchased by Indian refiners was below the price cap, but some cargoes were above that price too.

He further elaborated that India isn’t being prevented from buying above the cap. He said some payments for Russian cargoes were delayed but refiners are coming up with solutions to pay for the crude purchased above the price cap, adding that India is also seeking discounts on crude from other countries depending on the oil grade.

But, the cap price is applicable on FOB (free on board) basis — the liability and ownership of the goods have been transferred from a seller to a buyer, whereas Russian crude is being delivered at Indian ports by the sellers on CIF Cost, Insurance, and Freight – basis (the fees a seller pays to cover the costs).

Cap concerns

By sourcing crude from Russia, commercially India is doing the right thing. But what are the challenges India may face if it continues to source Russian oil? What are the options available for India and will OPEC+ prove to be a party spoiler on oil prices?

One also needs to note that India is buying from non-OPEC producers too. According to media reports, OPEC’s share of India’s oil imports has fallen at the fastest pace in 2022-23.

According to Anas Alhajji, Energy expert and Managing Partner, Energy Outlook Advisors, LLC, “As long as India is being opportunistic, there is no problem increasing dependence on Russia oil while stitching long-term contracts with other suppliers.”

But, from energy security point of view, the current situation is not sustainable and might backfire, he cautioned.

“India cannot afford to offend its historic and long-term suppliers. That is why imports from the Gulf remained steady while imports from the US and Africa declined substantially. In short, so far so good,” he said. “To avoid future problems, public banks with large foreign presence would shy away for processing payments for cargoes sold above the price cap to avoid in retaliation from the US and the EU.”

According to Sumit Ritolia, oil analyst at S&P Global Commodity Insights, in the interests of maintaining geo-political balance, some Indian banks have stopped clearing payments for Russian oil above the $60/barrel cap.

Payment challenges can impact the cost and reliability of crude oil imports from Russia. Apart from supply sustainability, refining constraints can also be an impediment.

Refining constraints

Russian crude now accounts for about 35 per cent of Indian imports, but is close to the maximum potential of 40-45 per cent set by refining constraints.

“This is because Indian refiners are facing issues concerning the mercaptans (R-SH) in the jet/kerosene cut while processing the Urals in neat form. Kero-Merox units are facing issues in handling kerosene cuts of neatly processed Urals, and that stream needs to be bypassed to hydrotreaters. This will push refineries to process Urals in blended form with other crude grades and eventually constrain upside of Russia crude inflows into India,” he elaborated.

So what are India’s options?

“India’s problem has been always the inability of policymakers to strike a balance between security of supply and prices of various energy imports. They chased lower prices and ended up paying a heavy price during periods of shortages and stiff competition from other countries. For example, India benefited last year from the lockdown in China, but this is not the case now. The possibility of LNG prices reaching new records this coming winter is high. The only way to reduce cost is to sacrifice climate objectives,” Alhajji pointed out.

According to Ritolia, Indian refiners will try to diversify from Americas (US, Canada, Brazil, Argentina), West African countries (Nigeria, Angola, Gabon, Ghana, Congo) and balance it with the lion share from Middle Eastern and Russian crudes. Overall, India has wide-ranging options for crude purchase but in the end, it boils down to how refinery economics works for crude purchase.

Will OPEC+ prove to be a party spoiler as far as oil prices are concerned?

OPEC+ members are happy with current prices, said Alhajji adding that the average for the year would be way higher than in years before 2021.

China factor

“The fight is between China and OPEC. China will use its strategic petroleum reserves to prevent oil prices from rising, while OPEC will struggle to prevent oil prices from declining. A new dynamic is emerging in a way that we have never seen before: OPEC members buying Russian petroleum products to use in their domestic markets while cutting production! The coming summer could be different from any in the past as the impact of the power burn on oil market balances is way lower,” he pointed out.

“The market volatility before April 2 appears to have increased the OPEC+ determination to stay ahead of demand uncertainty. It also indicates the price objectives of OPEC+ might be above $80/barrel,” said Ritolia.

So, in such a situation India’s ability to negotiate favourable pricing and contract terms will come to play, if it does not want to be too reliant on a single supplier. Also a focussed approach on upgrading public sector refineries is the need of the hour.

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