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Press Release [FREE Access]
Petro Intelligence » Asian Premium: Will It Crack As Supply Basket Widens?

by R. Sasankan

Donald TrumpIn the rough and tumble world of petroleum, the two snippets of information may not have created much of a stir. For the first time, Indian Oil Corporation (IOC) has bought a cargo of US crude for delivery in October 2017. Bharat Petroleum Corporation Ltd (BPCL), another state-owned company, has struck a similar deal. In a country that imported as much as 213 million tons of crude in the previous financial year and ranks among the top three crude importers in the world, it is but natural that the import of a couple of cargoes from the US would not have attracted great attention.

But the significance of the US deal lies in the fact that this would not have happened without the knowledge of Prime Minister Narendra Modi or his office. It may sound ridiculous to suggest that the Prime Minister of such a large country would be deeply interested in such trifles, especially when global crude prices are so low.

Narendra ModiModi visited the US only a few weeks ago and had extensive discussions on energy matters with President Donald Trump who made no secret of his interest in selling US LNG to gas-starved India. But crude travels faster than LNG. The crude deal serves the strategic interests of the country, as perceived by Modi. It is path breaking because there cannot be any kickback in the purchase from the US.

This could be the biggest blow to Middle East suppliers who have tacked on a charge, widely known as the Asian Premium, on crude supplies to Asian countries, more particularly India. Till now, India has paid the charge without demur. One reason for this was that it was an elaborate device which had a built- in component to route kickbacks to the ruling dispensation in these countries.

Vashapadi RamamurthySince the 1970s, the petroleum sector emerged as the single biggest source of finance for the political party in power in India. The ruling combination may have changed at the Centre but the main source of revenue remained intact.

Be it the Congress or the United Progressive Alliance (UPA) led by it, the National Front headed by H.D. Deve Gowda or the National Democratic Alliance (NDA) under A.B. Vajpayee, the petroleum sector remained a top priority area in their scheme of things. Prime Minister Deve Gowda kept the petroleum portfolio with himself. Vajpayee, as NDA Prime Minister, had to appoint Jayalalitha’s nominee Vazhapadi Ramamurthy as petroleum minister in his cabinet. Ramamurthy, a solitary MP from a breakaway faction of the Congress who was elected with AIADMK support, failed to honour his commitment to Jayalalitha on the periodic flow of monetary contributions to her party. Jayalalitha was furious and demanded his sacking. Vajpayee refused to oblige and the rest is history.

Manishankar AiyerCrude oil scandals have roiled several governments. The first major economic scandal related to crude oil erupted in early 1980s when the details of the Kuo Oil deal spilled out into the open and rocked Indira Gandhi’s government. In many ways, the disclosures stemming from this deal necessitated the creation of a sophisticated mechanism for mobilizing funds from petroleum deals for the ruling party.

The Asian countries are economically backward when compared with the US and Europe. If anything, they should have been asking for a discount on not agreeing to pay a premium on crude oil imports. But the Middle East suppliers preferred to charge an Asian premium on crude, which had a logic of its own.

This column is not expected to be a study on the Asian Premium. For the benefit of our readers, I would like to say that the Asian Premium is a mixture of many things: competitive advantage in lower shipping costs and available low cost export infrastructure, a lack of an Asian spot market and the pernicious system of kickbacks. It gradually degenerated into a racket to keep the political dispensations in good humour. The scale of the kickbacks, which permeated almost every level of the governance system, prevented the Asian spot market from becoming a reality.

Dharmendra PradhanThe first protest against the Asian Premium was articulated by Mani Shankar Aiyer, the petroleum minister in the Manmohan Singh-led government. But he gave it up mid-way, obviously under the advice of his political bosses. The present petroleum minister, Dharmendra Pradhan spoke against the Asian Premium at an OPEC meet June 3, 2015.

The market forces have started to erode the Asian Premium, especially now when there is a glut in the crude oil market. The very fact that the Indian PSUs have entered the US market to buy crude is the clearest indication that the kickback component is no longer important in the present scheme of things.

Of course, this does not mean that the Asian Premium is going to disappear. But the best guarantee against the Asian Premium lies in the diversification of crude supplies. The US’ entry as a crude supplier will bring in greater transparency in the oil trade. Russia’s Ural crudes have also entered the Indian market. The Russians, however, have a flexible approach towards business promotion incentives.

 



To download the latest issue 'Volume 24 Issue 19 - January 10, 2018', click here
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