By R. Sasankan

India’s energy pundits have been arguing vehemently in recent years about the need to diversify the country’s crude oil supply sources in the interest of energy security. India has the distinction of being the world’s third largest crude oil importer; it meets 85 per cent of its crude oil requirement through imports. The diversification process has been going on for quite some time now. The current crisis has only intensified the debate – with a number of so-called experts arguing about the need to hunt for other sources of crude, preferably from Russia. But while doing this, no one has even attempted to ask one basic question: has this stab at diversification yielded any tangible benefits in the past?

The short truth is that it has not. India has been scouting for other sources of crude oil to reduce its dependence on supplies from the Gulf for a number of years. And yes, it has made several overtures to Russia as well. None of these efforts have moved the needle on India’s energy security; the situation remains more or less the same over the past two or three decades. The numbing truth is that it is destined to remain the same in the next few decades as well even though it has identified a number of new crude oil supply sources.

One reason for this is that India now has a gargantuan appetite for fossil fuels – and that isn’t going to diminish a whit anytime soon. There are feeble attempts to find alternative sources of energy; these are mostly in the gestation stage and it is hard to tell when the benefits from these efforts will start to pay off.

That means India will remain dependent on crude oil and natural gas as the principal sources of its energy requirements for a long time which is attested by the fact that the Modi government has pushed back its goal to achieve net-zero carbon emission -- under the auspices of the UN Climate Change Conference (COP26) in Glasgow, Scotland last November -- till 2070. Even this looks a little wishy-washy at the moment because this is contingent on meeting 50 per cent of its energy requirements from renewable energy by 2030. The overarching goal of net zero carbon emissions looks shaky because of many such laddered assumptions including the ability to pare projected carbon emissions by 1 billion tonnes between now and 2030.

The Middle East has been meeting India’s basic requirement for crude oil and there is no reason why India should seek other sources just for the sake of diversifying its fuel taps. There is a need to vigorously debate the virtues and benefits of such diversification starting with the parliament where no such discussion has ever taken place. Whenever the issue has been raised, the ministry of petroleum and natural has been happy to trot out a list of countries that have been added to the list of suppliers.

The Middle East has been India’s most reliable crude oil source; most of the contracts are evergreen, which means they are renewed regularly. But India has a problem with the Middle East suppliers: they prefer long-term contracts and want to supply large quantities. Most of them are reluctant to entertain fresh demands for crude. India’s oil consumption grows every year and, therefore, there will be incremental demand which the Middle East suppliers are either reluctant to provide or unable to meet at short notice. It is to meet this incremental demand that the Indian companies have been forced to hunt for other sources. It is this compulsion that is anchoring all the sudden talk about diversification.

Not very long ago, India needed some quantities of low sulphur crudes to meet new fuel quality standards – and for this it turned to West African countries. India today imports about 13.8% of its crude from Western Africa, mostly low sulphur. After the US imposed sanctions against Venezuela which was a source of cheap high sulphur crudes, India turned to the US to source this fuel. In FY 2018-19, the US share was 7.5 per cent against South America’s 10 per cent. But by FY 2021-22, the situation had changed: the US share rose to 13.6 per cent while South America’s dipped to 4.8 per cent.

Total OPEC (or Middle East) share in India’s imports, which was about 88% in the beginning of 2000, was pared to 71.8% as India looked to other sources to meet the rising demand for crude following periodic refining capacity expansions. The major factor which favours Middle East crude is India’s geographical proximity. Travel time is only about 5 days compared with 20 to 25 days from other locations. Consequently, freight and insurance costs etc. are lower. Moreover, the inventory has a large carrying cost. In comparison, the estimated freight plus insurance costs for the discounted Russian crudes is about $10 per bbl against the $ 1 per bbl for the Middle East crudes.

The point that emerges is that the absolute quantity of crude has, over the years, more or less remained constant. The incremental quantity has slowly shifted to sources in North/South America. With the addition of Russian crudes to India’s basket, the quantum of American crudes may also get reduced.

Some of our energy planners refuse to realise the fact that diversification always adds a cost. As one diversifies the sources of supply, new relationships have to be established, and new shipping deals have to be negotiated. Often, longer or more difficult routes have to be chosen, volumes get fragmented and refineries need to make adjustments to absorb new crudes. After all, the crudes from different geographical regions have different characteristics.

Most Indian refineries are designed to deliver optimal results only for a narrow band of crude specifications. All these elements add to cost. The sellers know these issues and are aware that the buyer is seeking to improve its security of supply. It is very rare to find new sources that will reduce the overall costs of import. It is likely that if such a cheaper supply source existed, then it would have already been tapped.

But we continue to pursue this dodgy strategy in the name of energy security. Additional security of supply does not come free. Let us face facts: a paltry discount on 2/3 days’ supply of crude that our refineries will be hard placed to handle in the first place is neither wise nor beneficial.

The options before the government, therefore, are limited. Energy expert, Dr Surya P. Sethi, says: “The only way to get cheaper long-term supplies is to invest in upstream projects in the free world where the rule of law prevails.”