By R. Sasankan

How many nations should India source crude oil from?

That is a stark question that is bubbling to the surface at a time when a cloud of uncertainty settles over the world economy which has started to see a slowdown in growth, potentially impacting demand for crude oil and its prices. Last week, US crude oil prices plunged to their lowest level since June 2023 while the Brent crude - the other closely-watched benchmark - sank to around $ 71 per barrel.

Bank of America has slashed its oil forecast for 2025 to $75 for Brent, down from $80 previously, and to $71 for the U.S. benchmark from $75 previously.

Citi anticipates that Brent prices will average $60 next year as the market is expected to enter into a substantial surplus.

India has always tried to hedge its risks and tended to source its crude oil from multiple sources - preferring small tenders, and driblets of crude oil from several source countries. The question is whether that strategy needs to be re-assessed.

The powers that be seem to be in no mood to break with what they believe is a tried-and-tested strategy.

Recently, Pankaj Jain, Secretary, Ministry of Petroleum and Natural Gas, said: "India's energy transition is centred on diversification of fuel sources. India's roadmap for energy transition comprises the use of multiple fuels from a wider source base to ensure availability and affordability."

In general, diversification of supply sources is a good strategy and India has been expanding its crude supply sources almost every year. In FY 2006-07, India sourced crude oil from 27 countries. By FY 2020-21, crude supply sources rose to 42 countries.

Being the world's third largest crude importer, India is now emerging as a heavy weight in the oil market. According to International Energy Agency's (IEA) World Energy Outlook 2022, India's energy consumption will double by 2040. India's energy demand is expected to grow at about 3% per annum till 2040, compared with the global growth rate of 1%.

The outlook also forecasts that India's share in global energy demand will double to 11% -- the sharpest growth in that period of any country -- from the current 6%. And in the process, India will overtake the European Union in terms of total energy consumption by 2030.

OPEC supports this view. In its World Oil Outlook 2022, it forecast that India will have the highest energy demand growth. Demand in India is projected to increase from 18.6 mb/d in 2021 to 37.7 mb/d in 2045.

That brings us to the critical question: How effective has India's crude supply diversification strategy been? Is it a well thought-out one? Is there any truth in the criticism within the oil market circles that India is behaving like an opportunistic carpetbagger?

Diversification has two key components: (a) geographical spread of sources to ensure that it can easily source the various grades of crude in the so-called Indian basket; and (b) the relationships that provide preferential treatment and geopolitical dividends -- more so in times of need! Both these require long term commitments from both sides.

A look at Indian imports (excluding deals struck by the private refiners Reliance and Nayara) indicates that over 85% of Indian crude is traditionally procured from the Middle East. First, the spread among countries within the Middle East is meaningless because if supplies from this region get disrupted, the diversification strategy will not work. Supplies from Saudi Arabia, Iraq, Kuwait, and Iran will suffer. Even supplies from the UAE dip significantly.

The sourcing of Russian crude is a recent phenomenon and is largely driven by discounts and the advantage of rupee payments. Russia offers a good diversification option but India has failed to strike a long-term deal with the Putin regime to source crude oil. It is also not clear how Russian crude is coming to India. There were some purchases from North America in recent times but these were not carried out under any long-term arrangement.

The current numbers do not demonstrate that the current diversification is well thought out. Most experts acknowledge that the old template is outdated. The latest thinking in certain oil industry circles is that India should totally revise its oil import strategy.

Instead of spreading itself too thin on the specious ground of oil security and signing deals with so many countries, India should concentrate on just three to four major producers from whom it should procure at least 70 per cent of its needs. The best sources would be Saudi Arabia, Iran, Iraq, UAE and Russia.

It is an accepted fact that small buyers do not command much respect before major crude producers. India is a big buyer but it is regarded as a small player because it prefers to spread out its sources of supply in the name of oil security. India is now poised to become the world's third largest economy in the near future and this cannot be achieved without raising crude imports.

The world is watching India's rise. Leading oil producers will also be keen to woo India to sign large long-term deals; in exchange, they will be prepared to offer attractive price terms. There is no need for any major diplomatic gambit here; the petroleum ministry has the gumption and the experts to clinch the best deal for the country.

The security bogey is no longer relevant in a changed oil market scenario. India's focus should be on getting the best price; this will be possible if it is ready to negotiate large deals with fewer sellers. There is no shortage of crude oil in the world. If anything, the world may soon have to grapple with a glut-like situation in the petroleum sector once the OPEC firms up its resolve to abandon the policy of voluntary production cuts.

India's energy planners cannot be unaware of these developments.

India has another bargaining chip in its favour; the crude oil producers with whom India signs large crude deals can be persuaded to store their crude in India as they need such facilities for exports. This can obviate India's need to maintain its own strategic crude storage caverns. All that the Indian government needs to do is get the large OPEC producers to agree to one condition: when there is a crisis, the Indian government will have the first priority to use the crude stored in those caverns.