US sanctions on Iran and pressure on India to reduce oil imports from the Persian Gulf nation pose a significant short-term supply risk and can impact profitability of Indian refiners, says Mangalore Refinery and Petrochemicals Ltd (MRPL).
In its FY2017-18 annual report, MRPL said it is looking at alternate oil sources like Australia, West Africa and South America to supplement any reduction in supplies from the Persian Gulf nation, which supplied a quarter of its oil needs.
MRPL sources more than 65 per cent of its nearly 16 million tonnes a year crude oil requirement from the Middle East through fixed-term contracts. Iran supplies about 25 per cent of its oil needs.
"The recent developments surrounding Iran and imminent US sanctions and pressure on India to reduce imports from Iran point towards a significant short-term supply risk to the company," it said.
The US, which in May pulled out of a landmark nuclear deal and said sanctions will be re-imposed on Iran within 180 days, has threatened to cut off access to the American banking system for foreign financial institutions that trade with Tehran.
Iran was India's second biggest supplier of crude oil after Saudi Arabia till 2010-11 but western sanctions over its suspected nuclear programme pushed it to the 7th spot in the subsequent years. Sourcing from Iran increased following the lifting of sanctions and it was the third largest supplier in 2017-18.
Of the 15.98 million tonnes of crude oil MRPL bought during fiscal year ended March 31, 2018, 12.52 million tonnes came via imports. Iran supplied the largest volume of 4.72 million tonnes, followed by Saudi Arabia at 4.35 million tonnes.
"The sanction on Iran, which is an important supplier of crude to the company, is also an immediate threat to profitability. The reduction in supplies of crude from Iran, following sanctions will have an impact on crude prices globally and will affect the company in the short term," MRPL said. "To a lesser extent, the ongoing clean fuel regulatory changes will also have an impact on the company and will necessitate the addition of facilities to comply with the requirements."
Stating that India is exposed to global energy risks, MRPL said the geopolitical situation in the Middle East, sanctions on Iran and the recent increases in oil prices and consequently, gas prices can potentially impact growth in sectors other than primary energy.
"The global scenario of the petroleum industry is also influenced by geopolitical tensions in the Middle East. The recent Iran sanctions and the continued political instability in some countries of the Middle East can potentially have a major influence on the global oil markets," it said.
MRPL said it is taking steps to diversify the crude basket so as to reduce its reliance on a single geographic area to meet its crude requirement.
In FY2017-18, the company said it processed two new crudes -- Qarun Blend from Egypt and South Green Canyon from the US on a trial basis. "The company is also looking at alternate sources like Australia, West Africa, and South America to meet part of its crude requirements for diversifying the crude basket to mitigate the risk of non-supply of specific crude due to geopolitical situation."
The company has entered into long-term agreements with various national oil companies to ensure not only required supplies but also procurement at reasonable prices, it said.
MRPL said crude oil prices have been strengthening in the wake of major geopolitical developments in the Middle East, production cuts by OPEC and imposition of fresh sanctions on Iran.
Also, tariff issues between the US and China, though excluding crude oil and gas trade, has the potential to slow down the global economic growth which has been recovering on the back of robust growth in global trade.
"This contraction in the global economy can put pressure on the demand for petroleum and petrochemicals, impacting the prospects of the company," it said.
Crude prices are volatile and are based on various factors like supply side decisions by the major producers, demand variations, geopolitical developments and market sentiment, it added.
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