A crude shock from Moscow: Testing times for India's energy security

Russia now accounts for a little less than half of India's oil imports but the current political instability raises serious questions about the long-term reliability of supply

These are testing times for India’s energy security. Nearly one of two barrels of crude oil imported into the country comes from Russia — the highest ever for any crude-supplying nation — a country that after last week’s mutiny by a close associate of President Vladimir Putin looks increasingly unstable to be reliant on for large purchases of oil.

Civil war in Russia was averted after Belarusian President Alexander Lukashenko, an ally of Putin, prevailed upon Yevgeny Prigozhin, the leader of the Wagner group, which supplies private armies to nations to fight wars including the ongoing conflict in Ukraine. An uneasy truce prevails in Russia after Prigozhin marched into a border city and took control. Reports said that he was just 300 kilometres from Moscow when Lukashenko managed to convince him to scrap the advance and move to Belarus, in return for the Kremlin removing treason charges.

Though this may appear to be an internal Russian problem, growing instability and Putin’s diminishing authority have consequences for India because imported crude meets over 87 per cent of India’s oil needs, and Russia accounts for 45 per cent of that requirement, according to trade data. India secures discounts of $8 to $13 a barrel against European benchmark Brent crude on purchases of Russian oil, according to state oil refining officials.

The risks of disruption in supplies and output is reflected in the case of Sudan where a civil war led to the carving of South Sudan from Sudan in 2011, leaving state-run explorer ONGC with around $600 million in outstanding payments, according to government data.

There are no interruptions to supplies of Russian oil, with shipments to India still at near-record levels this month. But internal strife in Russia does raise questions especially because India is pursuing long-term contracts with Russian state-oil producer Rosneft instead of restricting purchases to the spot market.

New Delhi wants to further increase purchases of Russian oil, an industry official said. State-run refiners are, however, not very comfortable with over 40 per cent dependence on Russian oil, preferring a wider palette of suppliers. Moreover, Indian refineries are not equipped to process such high volumes of Russian Urals crude, the official added, because existing plants lack the equipment to convert residues or the bottom of the barrel into valuable fuels like diesel.

State-run refiner IOC, the country’s biggest refiner, agreed last month to a term contract to source around 365,000 barrels a day (b/d), or over a fifth of its total oil imports, from Russia, and fellow refiner BPCL is in talks with Rosneft to source a little over 100,000 b/d on term basis. Indian imports of discounted crude oil from the Russian Federation hit an all-time high in May, with IOC becoming the biggest importer of Russian oil, Kpler data shows.

Not everyone thinks this heavy dependence is a major problem. “These are opportunistic purchases, which can be easily downsized or reversed if circumstances so demand, as long as there is no shortage in global crude supply,” said Vandana Hari, an oil industry expert from Singapore, adding, “The only ‘danger’ here, I suppose, is India getting used to the idea of securing 40 per cent of its crude at a 30 discount.”

“As of now, there is no reason to believe that Western sanctions against Russia would be lifted any time soon, which means the Russian crude outlets are limited to China and India,” she added.

But domestic political considerations could play a role in keeping India hooked on cheap Russian oil. “With the general elections approaching, top priority seems to be to keep petroleum prices within the manageable limits for the economy as well as for the ordinary consumer,” said Narendra Taneja, a leading Indian energy expert.

It is not domestic pump prices alone. Along with China, India is helping keep a lid on global crude oil prices. When the Ukrainian war began in February 2022, prices of India’s crude oil basket surged to $116 per barrel in June from $85 in January, before moderating to $75 this May. This cooling of prices was in no small measure due to China and India lifting a combined 4.5 million b/d of Russian oil, nearly 5 per cent of global oil demand.

Though China and India account for nearly all Russian oil exports, the share of Russian crude in China’s overall crude oil basket is less than half of India’s share, according to estimates by the US-based Energy Intelligence Group. China is still the biggest buyer of Russian oil, hitting a new record of 2.3 million b/d in May. Beijing buys more of the lighter, sweet Russian grades such as ESPO, which are sanctioned. India buys more of the heavier, higher sulphur Urals grade that trades below the $60 a barrel price cap imposed by Western nations.

The share of Russian oil in India’s crude basket has increased to 40 per cent this calendar year compared to 18 per cent last year and 3 per cent in 2021. In May, India’s Russian oil supplies exceeded the combined shipments of the next six biggest shippers including Iraq, Saudi Arabia, Mexico, UAE, Kuwait and the US. Supplies from Iraq, India’s biggest crude supplier in 2021, have dropped by 5 percentage points to 18 per cent this year while Saudi supplies have stagnated at 16 per cent.

Explaining the risks of opportunistic purchases in India’s crude basket, R Ramachandran, an oil industry consultant and former refining head at BPCL, said that in the past Indian refiners preferred security over profitability, but the advent of US shale oil introduced India to an alternative market, enabling an expansion of crude suppliers. From plants only designed to process Arab Mix grades, Indian facilities can now process more than 100 crudes, he said. But Gulf nations led by Iraq, Kuwait, UAE and Saudi Arabia are still the most reliable suppliers, which can assure both volumes, and reliability, because of their proximity to India. “When everybody’s gone, Saudi Arabia says that it will still be the last man standing,” he said.

The international oil order is going through a fundamental and structural change ever since the beginning of the crisis over Ukraine. There are, broadly speaking, two poles now: the old one dominated by the American dollar and the new one with Russia and China (and yuan). Therefore, Russia will now stay as a significant supplier of crude to India probably in the same league as Saudi Arabia and Iraq, Taneja said. But political turmoil in Moscow could well destabilise the stability of this supply.