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India refiners eye better oil contracts, cite US boom

03.06.2014  | 

A shale-oil boom in the US, the world’s biggest consumer, has pushed crude production to the highest in almost 26 years, leading the country to cut imports. In response, some of the biggest Middle East producers are turning to Asian nations such as India to lock in buyers.



India, Asia’s second-biggest energy user, is in talks with Saudi Arabia and Kuwait for better terms on oil contracts as surging US output frees up supplies.

Hindustan Petroleum, India’s third-largest state refiner, is seeking to at least double the interest-free credit period for crude purchases from Saudi Arabia and Kuwait to 60 days, B.K. Namdeo, the company’s refineries director, said in Mumbai. 

Mangalore Refinery & Petrochemicals wants price discounts for agreeing to contracts that are more than 10 years long, according to Managing Director P.P. Upadhya.

“Discussions are going on, and we expect the extended credit period to be reflected in the new contracts from April 1,” Namdeo said. “There is a surplus in the market, and India should take full advantage of the situation.”

A shale-oil boom in the US, the world’s biggest consumer, has pushed crude production to the highest in almost 26 years, leading the country to cut imports. In response, some of the biggest Middle East producers are turning to Asian nations to lock in buyers as the easing of sanctions on Iran brings more oil into the market.

“Deals between Indian refiners and countries in the Middle East are best viewed as a security of supply effort,” said Abhishek Kumar, a London-based energy and modeling analyst at Interfax Europe Ltd.’s Global Gas Analytics. “Countries like Saudi Arabia and Kuwait are as much concerned about competition from Iran as from the U.S.”

Credit Terms

Indian Oil, the nation’s biggest refiner, is in talks with some Middle East suppliers, including Saudi Arabia and Kuwait, to increase the credit period for crude purchases to 60 days, its finance director P.K. Goyal said in an interview in New Delhi. Iraq, the company’s biggest crude supplier, started offering 60-day credit from January, he said.

Iran currently gives Mangalore Refinery and Mumbai-based Essar Oil 90-day credit.

“Until some years back, Saudi Arabia used to give us better payment terms, which was later stopped,” said B.K. Datta, Mumbai-based director of refineries at Bharat Petroleum, the nation’s second-biggest state refiner. “It will be good if payment terms are relaxed once again.”

Kuwait Petroleum officials couldn’t immediately be reached to comment on potential changes to payment terms. Saudi Aramco declined to comment.

Indian state-run refiners sell fuels below their production cost to help the government curb inflation. While they are partly compensated by the government, subsidies are often delayed, forcing the oil processors to borrow money.

Working Capital

“Longer credit periods from the biggest crude suppliers will help the refiners reduce their working capital loans, which in turn will bring down interest charges,” said Dhaval Joshi, a Mumbai-based analyst at Emkay Global Financial Services. “This is crucial, especially because the compensation provided by the government is not regular and takes time to come.”

Oil companies rose in trading today in Mumbail. Bharat Petroleum increased as much as 3% to 399.20 rupees, the highest since May 2013. Hindustan Petroleum gained as much as 3.8%, Indian Oil, 2.2%, and Mangalore Refinery, 3.5%.

Nuclear Program

Imports of Iranian crude by countries including China, Japan and India rose by 100,000 bpd in January to 1.32 million bbl as a deal easing sanctions over Iran’s nuclear program took effect, the International Energy Agency said in its monthly oil market report released Feb. 13. Six world powers including the US agreed to ease sanctions on Iran in November in return for curbs on the country’s nuclear program.

“Negotiations between Iran and P5+1 may result in the lifting of the ban on petroleum products from Iran, which is certainly not ideal for countries like Saudi and Kuwait,” Kumar said. “Therefore, they are keen on long-term contracts with Asian buyers prior to the lifting of sanctions on Iran.”

India, which imported about 185 million metric tons (3.7 million bpd) of crude in the year ended March 2013, gets about 63% of its requirement from Middle East suppliers including Saudi Arabia, Kuwait, Iraq, Iran, the United Arab Emirates, Qatar, Oman and Yemen, according to data from India’s Ministry of Oil.

Saudi Arabia is the biggest supplier, followed by Iraq and Kuwait, together making up 43% of the South Asian economy’s total oil imports, according to the oil ministry.

‘Attractive’ Discounts

“Pressure is obviously there on the Middle East suppliers,” to improve credit and pricing terms, said S. Varadarajan, chairman of Bharat Petroleum. “Very clearly, there are ways and means by which Indian refiners could look at extracting better pricing and better terms. Maybe longer term commitments could translate into some of the terms and prices being relaxed.”

“Longer term commitments must necessarily come with attractive price discounts,” Mangalore Refinery’s Upadhya said. “If Kuwait is offering good discounts, I don’t see why Indian refiners can’t commit to longer term contracts.”

US production has averaged 8.1 million bpd so far this year, up 43% from 2011’s average, according to the US Energy Information Administration. Advances in oil extraction from shale rock will boost output to a 28-year high this year.

With the world’s biggest consumer becoming a more energy- independent nation, there will be cutbacks in imports from Saudi Arabia and Nigeria.

US Purchases

The US bought 3% less crude oil from Saudi Arabia in 2013 compared to the previous year, while imports from OPEC fell more than 13 percent, according to EIA data.

The US supplied 86% of its own energy last year, data of the statistical arm of the US Energy Department showed. With average oil production estimated at 9.2 million bpd in 2015, up from 7.4 million last year, the US will free more supplies in the market.

“As far as ability to negotiate is concerned, very clearly because because US production is increasing, it will be advantageous for countries which are import dependent,” Bharat Petroleum’s Varadarajan said.

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Pranab Basu

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