Power play - India wields oil 'weapon' to cut dependence on Saudi
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[April 02, 2021]
By Nidhi Verma
NEW DELHI (Reuters) - When India's
government last month asked refiners to speed up diversification and
reduce dependence on the Middle East - days after OPEC+ said it would
maintain production cuts - it sent a message about its clout and
foreshadowed changes to the world's energy maps.
It was a move that had been in the works for years, fuelled by repeated
comments from Indian Oil Minister Dharmendra Pradhan, who in 2015 called
oil purchases a "weapon" for his country.
When the Organisation of Oil Exporting Countries and Major Producers
(OPEC+) extended the production cuts into April, India unsheathed that
weapon. Indian refiners plan to cut imports from the Kingdom by about a
quarter in May, sources told Reuters, dropping them to 10.8 million
barrels from monthly average of 14.7-14.8 million barrels.
Oil secretary Tarun Kapoor, the top bureaucrat in the ministry, told
Reuters that India is asking state refiners to jointly negotiate with
oil producers to get better deals, but declined to comment on plans to
cut Saudi imports.
"India is a big market so sellers have to be mindful of our country's
demand as well to keep the long-term relationship intact," he said.
The Saudi state oil company Saudi Aramco and the Saudi energy ministry
declined to comment.
Pradhan, who sees high oil prices as a threat to India's recovering
economy, said he was saddened by the OPEC+ decision. India's fuel import
bill has rocketed, and fuel prices – inflated by government taxes
imposed last year - have hit records.
The International Energy Agency forecasts India's consumption to double
and its oil import bill to nearly triple from 2019 levels to more than
$250 billion by 2040.
An oil ministry official, who declined to be named because of the
sensitivity of the matter, said the OPEC+ cuts have created uncertainty
and made it difficult for refiners to plan for procurement and price
risk.
It also creates opportunities for companies in the Americas, Africa,
Russia and elsewhere to fill the gap.
If India is successful, it will set an example for other countries. As
buyers see more affordable choices and renewable energy becomes
increasingly common, the influence of big producers like Saudi Arabia
could wane, altering geopolitics and trade routes.
India has reduced the share of crude oil imports from the Middle East in
recent years.
DIVERSIFICATION DRIVE
India's oil demand has risen by 25% in the last seven years - more than
any other major buyer - and the country has surpassed Japan as the
world's third-largest oil importer and consumer.
The country has already curbed its reliance on the Middle East from more
than 64% of imports in 2016 to below 60% in 2019.
That trend reversed in 2020, however, when the pandemic pummelled fuel
demand and forced Indian refiners to make committed oil purchases from
the Middle East under term contracts, shunning spot purchases.
As India shifts gears again after Pradhan's call for faster
diversification, refineries are looking for new suppliers, the oil
ministry official said.
Costly refinery upgrades that allow for the processing of cheaper,
heavier oil grades have encouraged importers to seek out far-flung
sources. HPCL-Mittal Energy Ltd bought the country's first cargo from
Guyana this month, and Mangalore Refinery and Petrochemicals Ltd just
imported Brazilian Tupi crude for the first time.
In past years, refiners have jointly negotiated oil deals with
sanctions-hit Iran, which offered free shipping and price
discounts, and now plan to do the same with other producers.
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Oil tankers are seen parked at a yard outside a fuel depot
on the outskirts of Kolkata February 3, 2015. REUTERS/Rupak
De Chowdhuri/File Photo
Since the break with Saudi Arabia began, Pradhan has had meetings
with United Arab Emirates' minister of state and chief executive of
Abu Dhabi National Oil Co (ADNOC), Sultan Ahmed Al Jaber, and U.S.
energy secretary Jennifer Granholm to strengthen energy
partnerships.
Pradhan recently said African nations could play a central role in
India's oil diversification. The country is looking at signing
long-term oil supply deal with Guyana and exploring options to raise
imports from Russia, the oil ministry source said.
A separate Indian government source said the government expects
Iranian sanctions to ease in three to four months, potentially
offering India a cheaper alternative to Saudi oil.
Two traders agreed that Iran stood a good chance to benefit from
India's shift, as did Venezuela, Kuwait and the United States. An
Indian refinery source said the U.S., Africa, Kazakhstan's CPC Blend
and Russian oil would probably get a look too.
Although Indian importers will scoop up increasing volumes of
attractively priced global grades, most analysts expect the Middle
East to remain India's primary oil supplier, mainly because of lower
shipping costs.
India's oil ministry is working with refiners on a framework to
jointly negotiate terms with suppliers.
"Buyers have alternatives in today's market and these alternatives
are going to multiply going forward," Kapoor said. "There are so
many companies in India that do buying at their own level, so these
companies coming together also becomes quite a big bloc."
On Thursday, Saudi Arabia and OPEC+ agreed after discussions with
U.S. officials to ease oil curbs beginning in May.
Saudi energy minister Prince Abdulaziz bin Salman conceded that the
production cuts had put state oil company Aramco "in some difficulty
with some of its partners."
THE RELATIONSHIP
Analysts say the oil spat does not need to spill over into broader
strategic ties in other sectors, including defence.
"Until recently, the balance of power was skewed towards Saudi
Arabia, but increasingly, India is using access to its market and
the diversity of options to put pressure on Saudi Arabia,"
consultancy Eurasia said in a note. "For Saudi Arabia, losing market
share in a global environment in which most developed economies are
already seeing their oil demand decline due to green policy
implementation, would be a blow."
Abdulaziz confirmed that Aramco had maintained normal April oil
supplies to Indian refiners while cutting volumes for other buyers -
a sign Saudi Arabia is concerned about India's search for new
sources.
Saudi Arabia is India's fourth-biggest trade partner, importing a
slew of items, including food. Saudi Armaco is looking at buying a
20% stake in Reliance Industries' oil and chemicals business. It is
also a part of a joint venture to build a 1.2 million barrels per
day refinery in India.
But Amitendu Palit, senior research fellow at National University of
Singapore, said it would be difficult for Saudi to find a stable
alternative buyer if India continues with reduced purchases for too
long.
"This bilateral relationship should not be impacted due to any
decisions on one commodity. However in a global surplus, market
buyers have a lot of negotiating power and sources," Palit said.
(Reporting by Nidhi Verma; Editing by Florence Tan and Gerry Doyle)
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