New Delhi: With eight countries including India, getting conditional waiver from the US to buy Iranian oil after it reimposed sanctions on the Persian Gulf nation, Indian oil importers have secured temporary reprieve. “We have decided to issue temporary allotments to a handful of countries responsible to specific circumstances and to ensure a well-supplied oil market. The US will be granting these exemptions to China, India, Italy, Greece, Japan, South Korea, Taiwan, and Turkey,” US secretary of state Michael R. Pompeo said at a press interaction on Monday.
With US waiver, India’s Iranian oil imports to continue
On Monday, the US reimposed sanctions on Iranian energy, banking, shipping, and shipbuilding industries.
India is a major importer of Iranian oil – of the 220.4 million metric tonnes of crude imported by India in 2017-18, more than 9% was from Iran. Also, given that the country’s petroleum products demand has been growing at an compound annual growth rate (CAGR) of 5.5% between 2013 and 2017, India will need to come up with options that offer terms as attractive as those offered by Iran. The Islamic Republic had become a preferred supplier for India, making it the second largest Iranian crude oil purchaser of Iranian oil after China due to sweeteners such as 60-day credit, free insurance and shipping.
Petroleum minister Dharmendra Pradhan has credited the waiver to the efforts of Prime Minister Narendra Modi.
“Each of those countries has already demonstrated significant reductions of the purchase of Iranian crude over the past six months, and indeed two of those eight have already completely ended imports of Iranian crude and will not resume as long as the sanctions regime remains in place. We continue negotiations to get all of the nations to zero,” Pompeo added according to the text of the interaction available on the US State Department’s website.
Finding an alternative supplier at competitive terms quickly for India may be tough, as articulated by Sanjiv Singh, chairman at Indian Oil Corporation (IOC), the country’s largest oil refiner. Speaking to reporters on Friday, Singh said that while there are alternatives for sourcing adequate volumes, but prices may be affected in the wake of sanctions.
Moody’s Investors Service in a report on 27 September estimated around $500 million decline in earnings for Indian state-owned refiners, IOCL, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd, if they were to buy crude from sources other than Iran. Indian refiners maintain 65 days of crude storage.
“Additionally today, 100 percent of the revenue Iran receives from the sale of oil will be held in foreign accounts. Iran can only use this money for humanitarian trade or bilateral – in bilateral non-sanctioned goods,” Pompeo added.
The Organization of the Petroleum Exporting Countries (Opec), which accounts for about 40% of global production, is of the view that the global demand is expected to increase by 33% or 91 million barrels oil equivalent per day (mboed) between 2015 and 2040. Of this 24% or 22 mboed increase is expected from India.
State-run refiners Indian Oil Corp. Ltd and Mangalore Refinery and Petrochemicals Ltd have contracted 1.25 million tonnes of Iranian oil for import in November. IOC has a deal to buy up to 9 million tonnes of Iranian oil in the current financial year and has made payments for Iranian oil contracted till August.
“More than 20 importing nations have zeroed out their imports of crude oil already, taking more than one million barrels of crude per day off the market. The regime today, since May, has lost over $2.5 billion in oil revenue,” Pompeo said.
With India’s domestic production unable to the country’s ever increasing domestic demand, the country will continue to depend on imports for foreseeable future. India has been trying to diversify its supply portfolio, with firms starting to source liquefied natural gas and oil from the US. The options before it include increasing imports from sources such as the US, Iraq, Saudi Arabia, Nigeria, Venezuela, and UAE. This comes at a time when India has said that some Opec members have not made good their June decision to increase output by about one million barrels per day (bpd) or about 1% of global supply.
Arun Kumar Sharma, director, finance at IOC, on Friday said not many competitive US offers are in the market currently but expressed hope that the situation may change.
The problem for Indian oil refiners may get further exacerbated given the slide in the rupee that has made it Asia’s worst performing currency of the year. A case in point being IOC that registered a foreign exchange loss of Rs 2,600 crore in the July-September quarter as rupee depreciated, making repayment of loans as well as crude oil purchase costlier.
To stem this problem, oil suppliers including Saudi Arabia and Iraq have been communicated informally about Indian firms willing to make rupee payments as it will bring down the demand for dollars. This comes in the backdrop of India seeking a review of payment terms with major oil producers to help counter a depreciating rupee and high global crude oil prices.
Any rally in global crude oil prices will affect India’s oil import bill and trade deficit. Every dollar increase in oil prices has the potential to push up the import bill by around Rs 10,700 crore on an annual basis. While crude prices jumped 50% in dollar terms and 70% in rupee terms since last year, the prices have fallen from the four-year highs reached earlier last month. While Brent prices had softened on Monday and was trading at $73.17 per barrel, traders worldwide are betting on oil price to cross the $100 mark yet again.
The cost of the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, fell to $71.65 a barrel on 2 November, according to the Petroleum Planning and Analysis Cell. The October average price was $80.08 a barrel.