👍👍👍The challenge from Urals | Business Standard Column

Clipped from: https://www.business-standard.com/article/opinion/the-challenge-from-urals-123030701003_1.html

India’s oil pricing policies must be fine-tuned to reflect the new Russian reality

With imports of Russian crude oil rising rapidly in the last few months, the contours of India’s oil economy have altered in significant ways. However, these changes do not appear to have triggered a debate, as yet, within the government and oil companies on how various existing pricing arrangements and systems should be adjusted to reflect the new reality.

Russia has now become the single-largest supplier of crude oil to India, relegating Iraq, Saudi Arabia and the United Arab Emirates to the second, third and fourth spots, respectively. The United States, which had inched up to the fourth position, is now only the fifth largest supplier of crude oil to India.

The increase in the supplies of Russian crude oil or Urals to India began in the wake of the Ukraine-Russia war that started in February 2022. Sanctions against Russian oil by the US and European countries meant that Urals had to look for alternative markets. For India, this was an opportunity as the price of Urals was reported to be 20-30 per cent lower than that of the Indian basket of crude oil. India took full advantage of the situation with smart diplomatic initiatives — increasing oil supplies from Russia even as it tactfully avoided any retaliatory action from the West for ignoring the sanctions.

How has India benefitted by securing a larger share of its crude oil supplies from Russia? In March 2022, when India began importing Russian Urals, such supplies accounted for just about 1.4 per cent of India’s total crude oil imports. In December 2022, the month up to which the latest Indian government data on crude oil imports is available, the share of Russian Urals rose to about 28 per cent of India’s total crude oil imports.

This has substantially diversified India’s sources of procuring crude oil, compared to what they were a year ago. Policy experts will certainly see this as a necessary enhancement of India’s energy security. A reduction in India’s dependence on West Asia, which accounted for about two-thirds of India’s total crude oil imports, should be a welcome development. What’s more, it was becoming clear that Russia’s share in Indian crude oil imports was not likely to decline in the normal course.

But has this diversification also led to a reduction in India’s total cost of procuring crude oil? Remember that Russian Urals cost 20-30 per cent less than the price of the Indian basket of crude oil. Expectations of Indian refineries benefitting from a reduction in the imported cost of crude oil, therefore, were quite high. That hope, however, has been dashed, as the latest government data on imports shows.

The fact is that India’s cost of importing Russian crude oil has been consistently higher than the prevailing international price of Urals by a substantial margin — ranging from 11 per cent to over 50 per cent. Moreover, there is hardly any difference between the cost of importing Urals by Indian refineries and the price of the Indian basket of crude oil.

The obvious question is whether the cost of transportation and insurance for importing Russian Urals could be so high as to completely neutralise the price advantage. Or are there other factors responsible for the denial of an obvious price advantage to Indian oil refineries? It is both a puzzle and a cause for concern that Russia today is India’s largest supplier of crude oil and yet, no refiner has as yet clarified why its landed cost of Russian crude oil is much higher than its internationally-quoted sale price.

Unfortunately, such opacity also exists in the way prices are determined in the oil sector. For instance, on paper, Indian oil refiners are free to fix the retail prices of major products like petrol and diesel. But in reality, these prices are often influenced by the government’s assessment and calculations. Thus, even when the price of the Indian basket of crude oil fell from $116 a barrel in June 2022 to $78 in December 2022 and went up slightly to $83 a barrel in March 2023, the retail prices of petroleum products did not adequately reflect the decline in their crude oil cost.

It was argued that the benefit of lower retail prices was not extended to consumers in an attempt to help refiners and marketers recoup some of the past losses they incurred when they could not fully pass on the impact of higher crude oil prices. It would appear that the idea of a market-linked free retail pricing of petrol and diesel still remains only on paper!

Equally important, how do the Indian refineries explain why their processing cost saw no significant decline in spite of the rising share of Russian Urals in the total volume of the crude oil refined by them? Clarity on this issue is necessary to ascertain if the refineries’ claims of continued under-recoveries are justified.

There is a larger question that India’s policy makers need to address. The price of the Indian basket of crude oil is the basis on which retail prices of petrol and diesel are fixed by the refiners. Now, this basket is composed of the prices of only two types of crude oil — sour grade (Oman and Dubai average) and sweet grade (Brent Dated). An average of these two varieties is worked out based on their use in the ratio of 75.62 and 24.38.

Note that there is no mention of Russian crude oil or Urals in such calculations. It is true that the Russian Urals became the single largest variety of crude oil in India’s import basket only in the last one year. But isn’t it time for rejigging the way the price of the Indian basket of crude oil is arrived at? Ideally, this should be a dynamic basket, reflecting the evolving composition of crude oil varieties that Indian refineries import for processing.

Oil pricing reforms should always be high on the government’s agenda. Indeed they should be even higher on the agenda when a major development such as Russia emerging as the single-largest supplier of crude oil has taken place.