Controversy over India's decision to buy Russian crude is overblown

Because the economics and logistics don't work out for Indian refiners to accept larger volumes

Much is being made of India’s crude oil imports from Russia. These imports are merely opportunistic buys because of the availability of Urals crude, and some discounts. Otherwise, Russian crude is bad economics for Indian refiners. The distances to transport it are huge, shipping times long, freight is expensive and Russia, even in peacetime, does not have enough oil to offer India.

It is true that volumes have surged since Russia invaded Ukraine. An average of 440,000 barrels per day of crude left Russia for Indian ports since the war began in late February compared with just 33,000 barrels a day in January and February, according to energy information provider Vortexa. Russian supplies in April 2021-February2022 averaged 86,000 barrels a day, according to Indian customs data.

But the US has little cause to complain because Russian oil imports are only a quarter of America’s crude oil sales to India, one-eighth of Saudi Arabian supplies and less than a tenth of Iraqi shipments. In fact, the US has become India’s fourth biggest crude supplier from virtually nothing a few years back.

Europe continues to be the biggest buyer of Russian oil and gas despite the war because of energy security issues. Despite sanctions, Russia nearly doubled its monthly earnings to ^22 billion a month compared to 2021 from selling fossil fuels to the EU, according to Finland’s Centre for Research on Energy and Clean Air.

Driving India’s oil trade are the generous discounts on tap, available because of sanctions and threat of bans on Russian oil. But Indian refiners capture less than a third ($8-$9 a barrel) of discounts offered on Russian grades, foregoing most gains to traders like Vitol, Glencore and Trafigura, according to an industry official. Others peg India’s gains lower at $2 a barrel, after adjusting for higher freight costs and expensive insurance forked out to ship the oil to India.

“The headline deals were done at a steep discount of around $30 a barrel,” said Singapore-based John Driscoll, a veteran oil trader and director, JTD Energy Services. But freight and insurance are very costly for Indian refiners, Driscoll added, eating into the gains of refiners.

Indian oil companies lack tank­ers, insurance and adequate storage to directly source Russian crude, and capture the entire discount, another industry official said. Western companies control both shipping and insurance, while European traders have long-term contracts for Russian supplies and access to tankers.

India faces concerns over oil supplies because it imports 86 per cent of its needs. India’s imports of Russian oil pale in front of European purchases, Indian foreign minister S Jaishankar has said. “India’s legitimate energy transactions cannot be politicised,’’ the oil ministry said on May 4. “Russian crudes have been a fixture of the country’s purchases over the past few years.’’

Russian volumes are still minuscule compared to over 5 million barrels a day of Indian consumption, said Narendra Taneja, an independent oil expert. Both economics and logistics do not work for Russian imports in normal times, he added.

Domestic political compulsions to keep prices of petrol and diesel stable at the pump coupled with steep premiums charged by India’s two biggest term suppliers, Iraq and Saudi Arabia, have forced state-run refiners to seek cheaper crude supplies.

Indian refiners typically search for the best value when evaluating crude grades. In normal times, for advanced refineries like in Panipat, Paradip, Kochi or Vizag it is sufficient for Urals to be cheaper by a little over $2 a barrel compared to, say, Arab Mix, a refinery official said. But less advanced refineries will need at least a $5-barrel differential to consider Urals because of issues dealing with residue in the crude.

Russian Urals are similar to some West Asian grades in terms of refinery yields for India. Saudi and Iraqi oil is priced off Dubai, a West Asian benchmark used to sell oil to Asian refiners, while Russian barrels are pegged to North Sea Dated Brent. So if India gets a $8 a barrel discount to Dated Brent on Urals, and with Brent trading at a premium of $7 a barrel to Dubai, that means Indian refiners actually get a discount of a dollar a barrel against Dubai for a Russian cargo. That compares with a record $9.30 a barrel premium over Dubai charged by Saudi Arabia for May supplies.

Uncertainty lies ahead. Indian refiners were reluctant to participate in Rosneft’s latest round of tenders for May-June loading as the terms were not attractive, Vortexa said. Indian refiners are also waiting to see if Saudi Arabia cuts premiums for June supplies, which will then make Saudi crude more competitive against Urals.

Also, commodity traders Vitol and Trafigura plan to stop trading Russian oil after May 15 when EU sanctions intensify. India then needs to directly negotiate with Russia for supplies. It can get better discounts only if Russia can arrange for shipping and insurance to deliver the cargoes because India can neither secure ships or insurance because of sanctions. Western fleet operators and insurers will not deal with Russia. Otherwise even the few cargoes that India received via middlemen will dwindle.