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One of the first challenges faced by the Narendra Modi government is from outside the country. The insurgency in Iraq rocked the oil markets initially. But once it was known that the fighting was restricted to the thinly patrolled northern Iraq region, while all the oil producing wells were in strongly guarded southern Iraq, markets have calmed down.
The fragility of global economies prompted international intervention in the issue. There are now talks that Iraq might see a change in leadership with a pro-Shia prime minister being replaced by a leader acceptable to the Shias, Sunnis and Kurds.
Though there may not be any problem in oil supply, the uncertainty in Iraq is resulting in higher oil prices. LK Gupta, chief executive officer of Essar Oil, was quoted in a Bloomberg article [Read here] where he said that there was enough oil in the market, so global supplies may not be affected, but the crisis can push up prices.
For India, imported crude oil accounts for 85 per cent of total consumption. Petroleum & Natural Gas Minister Dharmendra Pradhan reviewing the status of the availability of petroleum products in the country said that while India imported about 13 per cent of its crude oil requirements from Iraq last year, the public sector oil marketing companies (OMCs) planned to raise it to 20% this year. He added that against the 18.7 mn metric tonne of crude oil imports planned by Indian Oil and Hindustan Petroleum from Iraq in 2014, 50 per cent of the contracted quantity has already been lifted.
He clarified that crude oil supplies to India from Iraq come from the Basra oilfields which are situated well away from the conflict zone in the north-eastern part of Iraq and loading of ships, including by the two PSUs, from the Basra oil terminal, continues normally.
Nonetheless, the OMCs have been asked to prepare a contingency plan both for the short and medium term including diversification of their resources for import of crude oil in order to minimise the impact of any geopolitical instability in West Asia.
BN Bankapur, an oil industry consultant and former IOC director, was quoted in the same Bloomberg article saying that: “The entire Iraq crisis will be nullified for India if the US eases Iran sanctions. It is vital because Indian refineries will otherwise become too dependent on Saudi Arabia.”
While India is taking corrective action to ensure a smooth supply of crude oil, it remains exposed on the price front. Amit Shah and Shailendra Kumar Jain of BNP Paribas have quantified the impact in their report titled “The ‘price’ of Iraq – sensitivity analysis”. According to their analysis, in the unlikely event that oil price averages at $115 per barrel for FY15 with rupee averaging 62 against the dollar, under-recoveries will touch Rs 1,53,100 crore, nearly 47 per cent higher than their current estimate ($107 per barrel and an exchange rate of 59.25).
India is impacted by a mix of crude oil prices from across the globe known as the Indian crude basket. This price combines prices of three elements BFO (North Sea benchmark) which accounts for 38.60 per cent of the weightage; DUB–1M (Dubai benchmark) accounting for 30.70 per cent and OMA 1M-A (Oman benchmark) for 30.70 per cent. The Indian crude basket has moved up from $106.75 a barrel at the start of the month to $111.25 a barrel on June 18, 2014 ($103.2 per barrel for the same time last year).
While the Indian government has no control on global oil prices, it can work on softening the impact of the rupee along with the central bank.
