Govt works out math of keeping Russia supplies open as oil prices spike

Even if Moscow relents and sells oil for rupees to India, European insurers may be reluctant to underwrite; in any case a bigger Russian tilt would involve a larger financial switch by New Delhi

On Monday, the petroleum ministry and the state-owned oil companies had a long meeting on the impact of the oil price rise. There were no clear solutions at the end of the meeting, but the India government wants to keep the buying route to Russian oil alive. This has become even more necessary as the exports from the US, which had risen to 5 per cent of India’s imports in FY20, will not be available for the foreseeable future, according to petroleum ministry estimates.  

“Our challenge is to use the rupee-ruble route to buy oil from Moscow,” said a participant at the meeting. But just like sanctions hit Tehran, Moscow too has so far not been keen to sell oil or gas in anything other than in hard currency. 

The meeting with the ministry was divided into two parts. The first was to take stock of the preparedness of the oil companies to handle sudden supply shocks within India. ONGC and Oil India executives left the meeting thereafter. The ministry then made a careful appraisal of the risks and opportunities, with oil marketing companies like IOC, BPCL and HPCL (which is an ONGC subsidiary), to keep up their supply lines from abroad. 

While Russia has been reluctant to sell any energy products in Indian rupee till now, as the sanctions from Europe and the US begin to bite, India hopes this position will be softened. India has a problem using the rupee-ruble line because the terms of trade are adverse for it. “Had we got a surplus in our favour or even a balance, we could have encouraged Russia to square off the oil bills,” said a source aware of the developments. The adverse terms of trade means Russia runs up a larger surplus with India in the rupee account for every barrel of oil it sells here. The difference can only be squared off in future, when the sanctions are relaxed. Else India has to dip into its forex reserves to pay for those. 

The India government is most reluctant to let the forex reserves dip appreciably at this juncture, as it could create a scare in the markets. Matters could, however, be helped due to three reasons. Russia, even before the current sanctions, was pivoting to the idea of larger sales of oil and gas to both China and India. (China is already Russia's largest buyer). Second, the sort of oil Russia sells (sweet grade) can reduce the cost of refining for Indian refiners. This will enhance their margins and, to the extent they are exported, could soften India’s oil economy deficit. The third is that due to global warming, the Russian ships can now evacuate oil and gas from Arctic-facing ports for most of the year. While it is still a longer route compared to the Black Sea and then via the Suez Canal, to the western coast of India, the longer times for which the northern sea routes will remain open, counterbalances those costs. 

As one participant put it, “We have to grab every option wherever price is marginally soft.” The India government is convinced that imports from the US shall be nil in this quarter and in FY23. The US had supplied 10.7 million metric tonnes of crude oil to India in 2020 making it the fourth largest seller. The largest sellers to India was Iraq at 47 million tonnes, with Saudi Arabia next at 38 million tonnes, and UAE with 22 million tonnes. The US had also become India’s fourth largest natural gas supplier. President Biden has clamped on an oil embargo on Russian imports this week. India expects Russian supplies to rise in its total imports of 204 million tonnes, in calendar year 2020, to replace the US exports. 

But to put Russia higher in the list from its current one per cent, India will have to ensure a large-scale financial switch. With Iran, in order to get around the US-imposed sanctions, India had created an in-country escrow account in UCO Bank favouring the Iranian government to be able to pay for the sales in rupees. But Iran protested since the entire basis of the US-led sanctions was to cut its access to dollars. Tehran kept on pressurising India to find ways to pay in dollars for the oil and also offered no cut back in the price. The pressure only ebbed somewhat from FY19, once Mangalore Refinery and Petrochemicals, which used to import about $12 billion of crude from Iran annually, began to cut back on its purchases. It happened because no insurance company was willing to give cover for the shipments.

For Russia too, the Indian insurers are being wary. In global markets, insurance cover for oil is a lucrative business, but with the sanctions on Russia, European insurers may not be willing to underwrite. However the risks for the sector are quite low as the Russian market is small. An S&P report notes that while many global and regional reinsurers have exposure to Russia, those exposures are “very limited, in most cases less than one per cent of assets and existing liabilities, in some cases even less than 0.1 per cent”. 

India' energy consumption growth in April-January FY23 (year-on-year)

• Consumption of petroleum products grew 4.23% to 165.719 million metric tonnes
• Crude oil imports increased by 7.9% 
• Import dependency on crude: 85.1% (83.6% in FY22)
• Natural Gas Consumption grew by 7.9%  

Crude prices

Class	Spot	Futures (May)
WTI	125.2	120.8
Brent	130.0	129,0
Natural Gas	4.575	4.6
Opec Basket	126.5	Not applicable

Prices in $/bbl

Borrowings by oil marketing companies

OMC	Mar 21	Sep 21
IOCL	1,02,327	84,002
BPCL	26,315	21,001
HPCL	40,009	37,724

Figures in Rs crore

Opec production

Country	Jan 21	Feb 21	Difference
Iran	2,085	2,120	35
Iraq	3,839	3,898	59
Saudi Arabia	9,080	8,150	(930)
UAE	2,611	2,610	1
Venezuela	488	521	33
Kuwait	2,322	2,330	8
Total Opec (incl others)	25,496	24,848	(647)

Thousand barrels/day