The Indian government, amidst strain with Saudi Arabia over oil production cuts, has advised its state refiners, including IOC, BPCL, and HPCL, to source their oil supplies from beyond the Middle East region. The directive also encourages leveraging their combined negotiating strength to secure advantageous terms.
Tensions with Saudi Arabia
The onset of rising oil prices in early 2021 led India to seek a relaxation in output controls from Saudi Arabia. However, these requests were disregarded by the Kingdom, spurring the Indian government to push for supply base diversification. Traditionally, Saudi Arabia and other OPEC (Organization of the Petroleum Exporting Countries) producers have primarily supplied India’s crude oil, although their terms have been frequently skewed against buyers. The OPEC is an enduring intergovernmental organization comprising 13 oil-exporting developing nations that collaborate to coordinate and unify the petroleum policies of its member countries.
OPEC Member Countries
The ensemble of OPEC includes Iran, Iraq, Kuwait, United Arab Emirates (UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, and Venezuela.
Issues with Contracts with OPEC Producers
Indian firms acquire two-thirds of their purchases through term or fixed annual contracts. While these contracts assure supplies of the settled quantity, the pricing and additional terms tend to favor only the supplier. Under these terms, the buyer must confirm their intention to lift the agreed quantity from the annual term contract at least six weeks in advance and pay an average official price set by the producer. Despite being obligated to collect all of the contracted quantity, Saudi Arabia and other producers retain the option to cut supplies should OPEC decide to reduce production to inflate prices.
Options on the Table for India
India requires pricing flexibility and supply assurance, even during periods of production shortfall. India should also prioritize the choice of supply timing and quantity flexibility (the capability to decrease or increase). Indian refiners could consider trimming the quantities bought through term contracts and invest in more spot or current market purchases. Spot market purchases would allow India to capitalize on any price drops and reserve quantities. This mechanism operates akin to a stock market wherein shares can be bought when prices are low. State-owned refineries are also urged to consolidate their buying efforts and collaborate with private refiners like Reliance Industries and Nayara Energy.
India’s Dependence on Oil Imports
Being the world’s third-largest oil consumer, India imports 85% of its total oil necessities. Consequently, it is frequently susceptible to global supply and price upheavals. The Middle East supplies 60% of all oil procured by India, while the rest is mostly sourced from Latin America and Africa. In recent times, India has increased oil imports from the USA and newer sources like Guyana, which boasts a considerable Indian diaspora. Nonetheless, the Middle East remains a primary supplier due to its geographical proximity offering faster cargo delivery and lower freight rates.
