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Crude Supplies from West Asia Hang in Balance

  • RIL, Essar Oil better placed than public sector refiners.Private refiners Reliance Industries (RIL) and Essar Oil seem to have cushioned themsel-ves against possible disruption in crude oil supplies from Iran, which has threatened to shut the Hormuz Strait through which much of West Asia’s oil is shipped.But state-run refiner MRPL, owned by ONGC, may be in trouble if the supplies do get disrupted.RIL is better positioned: it has not contracted any Iranian crude in the current year. Essar Oil seems to have tapped other supply sources in Iraq and the UAE. It will also seek greater supplies from South American crude once the up-gradation of its Vadinar refinery is completed.

  • If Iran really shuts the strait, supplies to several countries, not just India, will be impacted.Two other government-run refiners, IOC and HPCL, also uses Iranian crude but not to the extent others do. But that does not mean they wil not face a supply crunch. BPCL is not buying Iranian crude till a permanent payment mechanism is in place.A Hormuz blockade is sure to push up Brent crude oil prices, acting as a double whammy for both the Indian government and its oil companies. The negative impact will show up in the balance sheets of IOC, BPCL and HPCL that sell diesel, kerosene and domestic cooking gas at subsidized, regulated prices. The government’s fuel subsidy bill will rise manifold, upsetting the budget balance.“New problems are no doubt arising with the US sanctions. However, I would like to assure everybody there would be no supply problems of oil and oil products for the consumer.

  • We are trying to solve the problem of payments to Iran,” oil minister S Jaipal Reddy said on Monday in Hyderabad.Iran is the second largest crude oil supplier to India after Saudi Arabia. It has threatened to block Hormuz, a sea route for nearly a fifth of the world’s oil. India and other countries are facing problems in paying Iran for oil supplies due to US sanctions. Quoting chairman of the US joint chiefs of staff General Martin Dempsey, Bloomberg hinted at US action to reopen Hormuz if Iran blocks it.“It is a question of payment route. Currently we have no disruption in crude supply or payments. As long as payments are cleared, we do not see a major problem,” said an official of a state-run refiner that buys Iranian crude.

  • India buys crude 18.499 million tonnes of crude worth $12 billion in a year from Iran, which supplies 12 per cent of our requirement. Currently, payments are made through Turkey’s Halkbank. Indian oil imports from Iran offers discounts and credit that no other country offers, said A K Prabhakar, senior vice- president and research head of Anand Rathi. The finance ministry and the RBI have been continuously exploring alternative safer routes to make payments to Iran. There are apprehensions that the US sanctions may force Turkey to deny routing these payments.

  • “Essar is not impacted by the Iranian situation. At our Vadinar refinery we continue to be able to source the crude we require from Iran. Our Stanlow refinery does not process Iranian crude,” Essar said in a statement.“The route (Hormuz strait) is never closed. So far there is no supply disruption. Moreover, sourcing of crude oil is trade sensitive information and we cannot reveal it,” IOC director of refineries RK Ghosh told FC. HPCL and ONGC echoed similar views.BPCL is awaiting a permanent mechanism for payments before buying in a bigger way from Iran, according to chairman R K Singh. B K Datta, director of refineries, said, “We have our contracts running with Iran and there are no supply side issues.”

  • “Iran supplies heavy crude Oil. But complex refineries such as that of RIL can afford to process cheaper extra-heavy sour crude from South America or Africa. Once the Essar refinery is upgraded, it will also start processing heavier and sour crude,” said an oil industry official.RIL spokesperson said a blockade of Hormuz might have some impact on the company which bought some from that region. “That too will depend on the number of days Iran can keep up a blockade. Every company has an inventory of at least seven days, and it takes at least four to five days for oil to reach the refineries. Till then there will not be any issue,” the spokesperson said.

  • RIL’s Jamnagar refinery has a Nelson complexity index of 11.3, whereas its refinery in the special economic zone has an index of 14. This makes it the most complex refinery globally. A complex refinery is able to process heavy and sour crude.Essar is increasing its refinery capacity to 18 million tonnes which will increase the complexity index from 6.1 to 11.8. The index at India’s largest state-run refiner IOC is 9.“Most of the oil and gas companies are now trying to diversify their sourcing to other countries to reduce dependence on Iran. Three options are Saudi Arabia, Libya and Russia,” said Deepak Pareek, senior analyst at Prabhudas Lilladher.Brent crude for February delivery was $112.67 a barrel on Monday evening. It touched an intra-day high of $113.42. Crude prices have gained in the past 15 trading sessions. In one month Brent has gained 3.87 per cent. In April-November, India imported crude worth $89.6 billion. In 2010-11, the oil import bill was over $100 billion.

  • “If the contracts are not honoured, then the price of oil for Indian companies is expected to increase by around 7 per cent. Officially, the price is around $113 per barrel, which for Indian companies would be around $ 130- $ 132 per barrel taking into account around 20 per cent depreciation of the rupee,” Prabhakar said.A supply disruption is likely to push up the fiscal deficit projected to be 5.5 per cent (the budget estimate is lower at 4.6 per cent). This may again have a negative impact on the government’s resources, forcing it to borrow more money from the market.

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