A reality check for Indian oil product exports amid international sanctions

EU's threat to sanction India for exporting petroleum products to its member-nations based on cheap Russian crude will not be an existential risk

India, along with China and Turkey, may be the next target for the US-led G-7 grouping, which is now setting its sights on sanctioning nations that convert discounted Russian crude oil into diesel, gasoline and jet fuel – known as “clean products” in the parlance -- and re-export these products to European consumers at full prices.

It is a lucrative business, controlled largely by Reliance Industries. India earned $58 billion from exports of all petroleum products in FY23, accounting for 13 per cent of its total exports by value according to oil ministry data. The government also has its fill by way of windfall taxes on fuel exports.

The EU barred imports of oil products from Russia from February, so European consumers turned to China, India and Turkey among others for fuel supplies. Europe absorbed up to 20 per cent of India’s exports of clean products in volume terms in the February-mid-May period. That was 11 percentage points higher from a year-earlier period.

Josep Borrell, the EU’s high representative for foreign policy, is targeting this trade as the 27-member grouping debates on a potential 11th package of sanctions against Moscow. “That India buys Russian oil, it’s normal. And if, thanks to our limitations on the price of oil, India can buy this oil much cheaper, well the less money Russia gets, the better,” Borrell said. “But if diesel or gasoline is entering Europe, coming from India and being produced with Russian oil, that is certainly a circumvention of sanctions and member states have to take measures,” Borrell told the Financial Times. “If they sell, it is because someone is buying. And we have to look at who is buying,” he said.

But after meeting Borrell in Brussels this week, Indian Foreign Minister S Jaishankar clarified that there are no sanctions on such resale. “Look at EU Council regulations,” Jaishankar said. “Russian crude is substantially transformed in the third country and not treated as Russian anymore.” He suggested a closer look at the sanctions regulations.

Top Indian officials said India typically follows all international sanctions. They point to Iran and Venezuela where US sanctions forced New Delhi to stop oil trade with both nations — while China continues to import Iranian and Venezuelan grades.

India doubled exports of clean products to Europe in the February-mid-May period to 25 million barrels from a year earlier period, according to Kpler data. Diesel/gasoil comprised over 40 per cent of the clean fuels, followed by gasoline and jet fuel. Shipments of clean fuels to Europe more than doubled to nearly 300,000 barrels a day (b/d) in March from 131,000 b/d in February, before dropping to 265,000 b/d in April, according to data from London-based data analytics agency Vortexa.

Since the imposition of the crude oil price cap (on December 5, 2022) and up to one year after the invasion (February 24, 2023), India (at 3.8 million tonnes) was the largest exporter of oil products to price cap coalition countries, followed by China (3 million tonnes) and UAE (2.9 million tonnes), said Finland-based researcher Centre for Research on Energy and Clean Air in a report last month.

The EU has until now avoided sanctioning a trade where Russian oil-derived fuels find a home in its member-states because it is virtually impossible to say if the diesel that India exported was made from processing Russian crude. Apart from Russia, India imports crude from West Asia and the US.

But what has caught the EU’s attention now is that Russian oil accounted for over 40 per cent of India’s crude imports this month, doubling from last year, and compared to 1-2 per cent prior to the Ukraine invasion. India's imports of all Russian crude grades averaged 2 million b/d in April and mid-May, fivefold higher from a year earlier, according to loading data from Kpler, which crunches ship tracking data to offer estimates.

Margrethe Vestager, EU executive vice president on competition, who was present with Jaishankar at the press briefing in Brussels this week, said that there was “no doubt about the legal basis of the sanctions”, and that the EU and India would have the discussion as “friends... with an extended hand and of course, not a pointed finger.” If the extended hand is not taken on the basis of legality in continuing the trade, then the EU may decide to bar the trade altogether.

Reliance Industries dominates fuel exports from its refinery complex at Jamnagar in Gujarat, accounting for nearly three- quarters of India’s overseas fuel sales. Rosneft-owned Nayara Energy came a distant second at a little over 10 per cent. State-run refiners are told to prioritise supplies of transport fuels to the domestic market.

Let’s look at what happened to India’s oil product trade flows since February. India’s potential for exports is limited by its refining capacity, and growing domestic demand for fuels. The country consumed 222 million tonnes of oil products in 2022-23, and exported 60 million tonnes. That compares to 63 million tonnes of exports in financial year 2021-22, before Russia’s invasion of Ukraine, on the back of a much lower 202 million tonnes in pandemic-affected domestic consumption. India’s nameplate refining capacity is 251 million tonnes a year but it has the ability to process 10 per cent more crude.

When Europe’s market for fuels opened this February after the Russian ban, Indian refiners reduced supplies to South Korea, Australia, Saudi Arabia, UAE, Singapore, and Malaysia while boosting shipments of diesel, jet and gasoline to Netherlands, France, Spain, Italy, Germany and Belgium, industry officials said, and data show.

Shipments to South Korea declined by 65 per cent, and that to Australia by 57 per cent in the February-mid-May 2023 period from a year earlier while those to Netherlands grew by 51 per cent, Kpler data shows. Shipments to Saudi Arabia and UAE shrunk by 80 per cent and 25 per cent respectively but supplies to Spain rose fourfold, and that to Belgium and Romania multiplied tenfold. Germany received nearly a million tonnes of clean products from nil a year earlier.

Therefore, Borrell’s threat, if exercised, is not an existential one for India’s oil product exports. European consumers may stand to lose more. But Reliance and Nayara will find it tough to compete with discounted Russian diesel currently sold in their traditional markets like West Asia or Africa. So India needs to find markets that bar discounted Russian fuels but are still willing to accept oil products made from cheap Russian crude.