By R. Sasankan
Russia is the world's
third-largest crude oil producer with proven reserves of 80 billion barrels and
production estimated at almost 10.8 million barrels per day. But for a little
over two years, Russian President Vladimir Putin has had to wrestle with a
major problem: he does not have enough buyers who will buy all of the crude oil
he wants to sell.
The Ukraine war has created a
situation where president Putin has been isolated by the western nations and
clobbered by tough economic sanctions.
The Kremlin has been forced to
find buyers who would be ready to run the gauntlet of western threats of
similar action against nations looking to buy cheap Russian oil that was
immediately on offer. Both China and India have chosen to brazen it out,
arguing that they would not tolerate any attempt to trammel their sovereign
right to defend their economic interests.
I had buttressed that argument in
an article titled "Crude Imports: The High Stakes In A Game Of Russian
Roulette" which appeared in Petro Intelligence column of
www.indianoilandgas.com on April 25, 2024: "President Putin knows that India is
a dependable market for Russia which can consume a significant portion of
Russia's gas and oil. The US and EU may have their own reasons to invoke
sanctions against Russia...The Russian President knows that a customer like
India cannot afford Russian crude unless it can offer an attractive price. The
swapping mechanism can be used to reduce transportation costs. But before that
Russia should agree to make its crude cheaper for India, a special deal which
calls for a political will on the part of that country. India's leadership can
take the initiative in broaching the idea. Nothing is difficult for an
imaginative political leadership especially when it wrestles with the
compulsions arising from the fact that India's crude import dependency is
poised to swell to 90 per cent by 2030."
Last week, I was pleasantly
surprised to read a Reuters report saying that Mukesh Ambani-controlled
Reliance Industries Limited had signed a one-year deal with Russia's Rosneft to
buy at least 3 million barrels of oil a month in roubles. It went on to say
that the deal was struck soon after Putin pushed Moscow and its partners to
find alternatives to the Western financial system to facilitate trade in the
face of US and European sanctions.
I examined the report but felt
disappointed over the sketchy details of the deal. Reliance is a private
company and cannot be expected to divulge all the details of the deal. However,
the deal accounts for about 2% of India's crude imports annually and under7% of
Reliance's annual crude consumption! What I found truly mystifying was the fact
that the discounts/premiums over the Dubai benchmarks amounted to just $ 1-3
per barrel.
The only real benefit, as far as
I could see, was the fact that it was a year-long contract (instead of spot
purchases on the high seas) and denominated in roubles (instead of the usual
mix of INR, UAE Dirhams and Chinese renminbi). The deal was with Rosneft which
is Russia's largest oil producer, and accounted for 33% of annual production
and 40% of refining capacity in 2023, according to the US Energy Information
Administration. Rosneft holds a 49 per cent stake in a refinery in Gujarat and
is in talks for another green field refinery in India. There have also been
reports that the Government of India has started to nudge Indian public sector
companies to strike deals similar to the one that Reliance negotiated with
Rosneft.
There are no details about any of
these claims in the public domain. No one, for example, knows whether these
discounts are based on landed costs at Reliance's refinery gate or FOB quotes?
And how much will Reliance save or lose at the Jamnagar Refinery gate? At what
parity has the Ruble been fixed? Is this just a 12-month deal? What happens
after that?
In my column, I had suggested a
concerted effort to strike a "real" deal -- sanctioned by the leaders of India
and Russia - which would protect the economic interests of both the nations. It
ought not to be piecemeal deals. After all, Putin needs a market like India;
equally, India needs cheaply priced crude in large quantities. Russia emerged
as India's top oil supplier in 2023. Cheap crude from Russia helped shrink
India's crude oil import bill by 15.9 per cent to $132.4 billion in FY 2023-24,
down 5 billion in the previous year.
India's crude import dependency is poised to
swell to 90 per cent by 2030. India's energy planners have been wrestling with
a variety of options. They have been trying to diversify the sources of crude
imports, both for term and spot purchases, even though there are no problems
with the availability of crude oil in the market.
Energy security is the compelling
imperative that is driving this effort. However, the recent emergence of
Russian crude in the Indian market in large quantities has demolished the
argument for diversified sources of supply. It now turns out that price is the
most important factor in the equation -- and this factor has swamped all other
considerations. There is a growing belief that it is better to concentrate on a
few countries instead of farming out contracts to all parts of the globe.
Quantity matters: a large buyer
is seen as a heavy weight with a lot of bargaining power. India is large.
President Putin needs a buyer like India. India's leadership, irrespective of
the party in power, has always enjoyed good relations with its Russian counterpart.
The US administration may not be
too pleased about India's growing dependency on Russian crude. The Indian
leadership can work its way through a diplomatic kerfuffle over oil sourcing.
The US Administration is aware that China is the biggest beneficiary of Russian
crude oil. It has not been able to do anything to stop Xi Jinping and Putin
from cosying up to each other. China gets nearly 800,000 barrels per day from
Russia via a pipeline in addition to imports by sea.
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