 "Discussions on for crude oil trading but companies fear transparency issues")
Soon, the way national oil companies import crude oil could be changed. The government is toying with the idea of substituting term contracts with an oil trading desk, the way oil is imported internationally.
A government official said this was being explored as the government wanted oil companies to get the best deal possible on crude oil imports. “We are examining if we can set up oil trading desk rather than relying on term contracts for importing crude oil. The final report on this would be finalised by March-April,” said an official from the ministry of petroleum and natural gas.
In early 2000, there was a call to replace the tender system by free trading but that change did not come about.
More From This Section
Internationally, in oil trading, most products are bought and sold through trading desks. The process is similar to forex trading that takes place on the desk of banks and commodities.
Industry players say in terms of pricing, trading through an oil desk is more efficient compared to term contracts as an oil desk provides better pricing, flexibility and more opportunities.
“While in the tendering system you get bogged down by standard terms and conditions which adversely impacts the competition, an oil trading desk provides you with flexibility and allows you to get the best possible deals,” said Naresh Nayyar, Deputy Chairman, Essar Oil.
Besides, on a trading desk you can enter and exit flexibly as you are operating 24/7 in the market while in a tender system you enter and exit the market only at a fixed time.
Public sector oil companies import crude oil by way of term contracts and through tenders. The major part, about 80%, of the crude oil imports is organised through term contracts and balance requirement is organised through spot tenders.
In the tendering process, OMCs first send tender inquiries to all registered suppliers. Broadly, three types of suppliers are registered with oil marketing companies (OMCs). They are NOCs, international oil majors and international oil traders. The offers are evaluated and a comparative statement is prepared. Summary of this evaluation is put up to an Empowered Standing Committee (ESC) within the company, which has Chairman and managing director, Director (Finance) and Director (Refineries) besides government representatives of the level of Additional Secretary & Financial Adviser and joint secretary (Refineries) as its members.
ESC finalises award of crude oil imports based on the comparative evaluation of offers and other issues like prevailing market conditions and refinery requirements presented by the OMC.
OMCs, currently do not enter into term contract for a period beyond one year. The National Oil Company (NOC) of the crude oil exporting countries prefer to have term contracts of one year duration, as it provides both the suppliers and the buyers the flexibility to revise the volume of term contract each year. Also, the NOCs do not prefer to have long term volume commitments in view of uncertainties in the crude oil market, their domestic demand scenario, strategic needs, etc.
Indian Oil, for example, had in the past approached the NOC of Kuwait for a longer term contract, but the same did not materialise.
To Indian companies, the West Asia is the natural source of supply of crude oil to India due to its geographical proximity to the country. Low sulphur crude oil is imported mainly from the Far East, West Africa and Mediterranean regions. However, the OMCs have been making efforts to diversify their crude oil import sources to other regions like Far East, West Africa, Mediterranean, Latin America etc, Angola, Brunei, Azerbaijan & Mexico.
Industry players importing crude oil said if oil was to be imported through an oil trading desk, the issue of transparency needs to be addressed.
“Transparency will be an issue as a lot of trust is placed on the trader who is negotiating a deal. In a tender system, however, negotiation is not permitted,” said the CMD of a public sector company.
In importing via the tendering process, the seller charges a premium on crude oil as he is taking a risk given crude oil prices fluctuate highly. In an oil trading desk, risk taken is less and not binding.
In spot trading, however, companies import on the basis of their respective requirement.
“Transparency can be had only if tenders are called. Many decades the tender system has stood the test of transparency as it is a rigid system. If the systems are tweaked, unless it is backed up by strong checks and balances, the traditional methods should be resorted to,” said a senior official of a private oil company.