Surging prices: Indian refiners push the envelope on Russia crude oil

With Urals crude prices on the rise, refiners are negotiating for bigger discounts and alternative currencies for payment

Indian refiners are concerned after the European benchmark Brent crude rose to the highest level since mid-April, marching towards $90 a barrel. The rise in Brent prices and the output cut by Moscow this month have made Russian Urals crude costlier, complicating matters for Indian importers, led by Indian Oil and Reliance Industries.

The surge in both Brent and Urals crude values since late July threaten billions of dollars in savings that Indian refiners made from imports of Russian oil, which was cheaper than competing West Asian crudes. Saudi Arabia has implemented deeper cuts to help lift oil prices.

Investment bank Goldman Sachs, in its latest report, expected the extra 1 million barrels per day (bpd) Saudi cuts to last through September and be halved from October; it raised its oil demand estimate by around 550,000 bpd. The bank expects crude oil prices to rise to $93 a barrel in the second quarter of 2024. Also, Russia is cutting output by 500,000 bpd this month, a sixth of its total exports, with supply cuts directed at its flagship, cheaper Urals grade. In June, competing Saudi and UAE crudes cost $14-$19 a barrel more than the Russian grade on a landed basis, according to Indian Customs data. But Urals, which accounted for a third of all Indian oil purchases in July, has started to trade above $60 a barrel on free on board (FOB) basis, complicating crude payments, and shrinking the discounts on offer for Indian refiners. 

Total savings from Russian oil were around $7.5 billion last financial year, and exceeded $3 billion in the first quarter of 2023-24, according to calculations made by Business Standard, based on the prices of competing grades and the delivered prices of Russian oil. Refiners substituted African and US grades, and Saudi Arabian and UAE oil to accommodate Russian crudes, a state oil refiner said.

For instance, the average price of Nigerian oil in 2022-23 was $109 a barrel; Saudi crude came in at $101 a barrel and UAE oil cost $104 a barrel, according to Customs data. US supplies averaged $92 per barrel. A simple average of these four grades, at $102 per barrel, exceeded the price of a barrel of Russian oil by around $19; based on the differential, savings last financial year on Russian oil would have been $7.5 billion, sufficient to cover state subsidies on LPG and energy transition in 2022-23 and this fiscal.

Savings may total up to $12 billion this financial year, based on April-June savings of $3 billion.

The impact on the petroleum trade deficit is higher. Savings on Russian crude amounted to around 5 per cent of total crude imports, and contributed substantially to a $13 billion increase in product exports in FY23 from a year earlier. Private sector refiners Reliance and Nayara have processed huge volumes of cheap Russian oil to export at a profit, industry watchers said.

Given such high stakes, Indian refiners are exploring innovative ways to pay for Russian oil. But queering the pitch are shrinking discounts on Urals crude, and trades above the G7 mandated price cap. Strictures by the West in December 2022 bar provision of financial and insurance services to Russian cargoes that cost over $60 a barrel. “As the price of Urals oil has exceeded $60 a barrel, lucrative profits of Indian refiners (which bought Russian crude and exported refined products to Europe and elsewhere) have narrowed,’’ said Tilak Doshi, a London-based energy expert. “But Russia has amassed a so-called shadow fleet of tankers with new transportation and payment arrangements that have, in some cases, allowed its oil exporters to evade the price cap mechanism imposed by G7 and the European Union.’’ 

Indian refiners are now negotiating the trade-off between shrinking discounts and the hassle that they go through to pay for Russian oil. That includes expanding the basket of currencies used to pay for Russian crude, and, in some cases, working around rules to ensure that Russian deals do not violate Western sanctions. 

Unlike China which pays for Russian oil in yuan, India cannot pay in rupees. Amid Western pressure, Indian banks like SBI, PNB, and Bank of Baroda demand detailed invoices to ascertain if the crude parcel violates the price cap, refining officials said. Russia is not keen on receiving dollars and Indian refiners are mainly paying in dirhams, executives of two state-run refiners said. There were a few trades in yuan and ruble, they said. The ruble lacks a market-determined exchange rate, and New Delhi has objected to yuan trades, they added.

That leaves Indian refiners an option to negotiate bigger discounts with traders; and, second, let traders certify the FOB price of Urals below $60 a barrel in the invoice while inflating freight and insurance rates. State refiners are affected more because they lack the flexibility of Reliance or Nayara to operate out of Dubai or Singapore. 

The price cap is the main reason for issues over payments for Russian oil even though the rules do not bar payments on trades made above the cap, a state refiner said. Private banks like ICICI have now stepped in to facilitate Russian trade transactions, a refiner said.

Payments are mainly in dirhams because dollar payments are routed via the US. The dirham has emerged as the lead currency, helped by growing economic ties between India and the UAE. 

Other options involve splitting invoices in two for high-value cargoes, industry sources said. To meet bank requirements, refiners must provide invoices detailing the FOB value of Russian oil. The seller provides this invoice. A first invoice, paid against the bill of lading document, is priced below the cap. A second invoice, for additional services, is then combined with other similar invoices and paid out separately, the sources said.