Amid tensions with Saudi Arabia over oil production cuts, India has asked its state refiners to review contracts they enter into for buying crude oil from the Middle East nation and negotiate more favourable terms. Few weeks ago the energy minister of the Saudi kingdom had summarily dismissed India’s plea to relax production curbs and had asked India to use its strategic reserves.
Keen to break producers’ cartel dictating pricing and contractual terms, the government has told Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) to look for oil supplies from outside the Middle East region and use collective bargaining power to get favourable terms.
India imports 85 per cent of its oil needs and is often vulnerable to global supply and price shocks. When oil prices started to rise in February, it wanted Saudi Arabia to relax output controls but the Kindgom ignored its calls. This has led to the Indian government now pressing for diversification of the supply base.
To begin with, Indian refiners will look to reduce the quantity they buy through term contracts and instead buy more from the spot or current market. Buying from the spot market would ensure that India can take advantage of any fall in prices on any day and book quantities.
Indian refiners have raised spot purchases from 20 per cent a decade back to 30-35 per cent of the total oil bought now. State-owned refineries have been asked to coordinate buying and also explore joint strategy with private refiners such as Reliance Industries and Nayara Energy.
India, the world’s third-largest consumer of oil, hopes to use the might of its market to change the terms of engagement with big suppliers. The Middle East accounts for 60 per cent of all oil bought by India while Latin America and Africa are the other big supplier blocks.
In recent months, India has bought more oil from the US and from newer sources such as Guyana, which has a large Indian diaspora. Due to its geographical proximity, however, the Middle East can supply cargoes in less time and lower freight.