JASUBHAI GROUP      ABOUT CHEMTECH     ADVISORY BOARD     AWARDS       EVENTS     PUBLICATIONS     CONTACTUS    
Chemical & Processing
EPC
Oil & Gas
Refining
Automation
Pharma Biotech
Shipping
Power
Water
Infrastructure & Design

Iran Crude: India’s Strategic Need
- Iain Weir-Jones, PhD, PEng President, Weir-Jones Engineering Consultants Ltd

Volatile crude oil prices and a depreciating Rupee against USD has inflated India’s crude oil import bill. Recently as rupee weakened and global crude oil price increased on account of geo-political tension in Middle East, concerns regarding high current account deficit mounted. To reduce the oil driven increase in current account deficit and under recoveries, government is contemplating alternatives including an increase in crude oil purchase from Iran, which has agreed to receive payment in rupees. It is estimated that USD 8.5 billion can be saved by importing an additional 11 Million tons from Iran.

Indian economy has been faced with high current account deficit, growth rate at decade low level and steep fiscal shortfall. To add on to this, rupee touched all time low levels against dollars and Brent price touched high levels of 117 USD/bbl. India currently imports around 80 per cent of crude oil, which accounts for about 30 per cent of India’s primary energy mix. Since crude oil is traded in US dollars, high crude oil price coupled with depreciating rupee value is expected to inflate the import bill. As Indian fuel market is not fully deregulated, the prices are not being passed on to end consumers which further aggravate the high current account deficit situation. Even the phased hike in diesel price is not expected to have any significant impact on the reduction of deficit.

Middle East Tensions
In last week of August risk premium on Brent widened resulting in price hike to six month high of 115 USD/bbl due to concern regarding the possibility of US militar y inter vention in Syria. Sanctions on Iran and recent labor and payment p roblems in Libya have l e d to OPEC crude disruptions to 2 mbpd. Thus, geopolitical tensions and fall in production raised the concerns about instability in the World’s key oil producing region. This led to sharp increase in Brent crude oil price resulting in hike in Indian crude oil basket price. Indian Crude basket comprises of Brent with 38.6 per cent and Dubai and Oman each with 30.70 per cent .

Indian Crude Basket price in Q3 2013 increased to 107.59 USD/bbl, an increase of around 6.25 per cent over Q2 2013 average price. This 6 per cent increase price led to increase in under-recovery and which eventually resulted in increase in current account deficit.

Rupee Depreciation
Indian Oil companies pay for import in USD, so with sharp decline in rupee the crude purchase becomes costly. As far as for downstream companies, when crude price increases the refinery margin and import parity also goes up. So with increase in crude price the product price also increases however, the increase in prices is not passed on completely to end users and results into a disproportionate increase in under recoveries. For example for BPCL Rs 1 depreciation against the USD the under-recovery increases by 80 to 90 paisa. In September when USD exchange rate was at 62, BPCL had an under-recovery of above Rs 10 on diesel.

Measure To Reduce Crude Oil Import Bill
In order to control the widening current account deficit, India has to control the import bill and therefore it has set a target of USD 25 billion cut in the import bill in the current fiscal. The main measure that would help in reducing CAD by USD 8.5 billion is import from Iran. India imported 13.1 million tons of crude oil from Iran in the last fiscal year. This year, it has already imported 2 million tons and aims to import another 11 million tons of crude oil this year. This has been possible due to the waiver on Iranian crude oil purchase during sanctions. This would result in a saving of USD 8.5 billion in foreign exchange (this is considering that the international price of the crude oil would be USD 105 per barrel).

In the last fiscal, India paid in EUR in order to clear 55 per cent of the crude oil purchased through Ankara based Halkbank, whereas, the remaining forty five percent of the purchases was settled in rupees through the Kolkata based UCO bank. However, the payment in euros through Turkey was ceased this year (February 6), and now the payment is done only in rupees, which in turn, helps in saving foreign exchange outgo and reduces the current account deficit. Iranian Oil Ministry is also planning to import 8-10 million liters of Indian premium gasoline per day instead of accepting full payment of crude oil in rupees. The Government of India has agreed to provide Rs 1000 crore sovereign guarantee to back local insurers for refineries using Iranian crude oil. This will boost imports paid in local currency and ease off pressure on Indian rupee.

Concern over US military action against Syria has also eased now as Syrian Government agreed to turn over its Chemical Weapons to international agency. This settlement has reduced the chance of supply disruption from Middle East region.

Conclusion
The Indian government needs to cut down high current account deficit as it would cause problems in the near future. Currently, CAD is highly responsible for several problems, which the India economy is facing like the fall of rupee in the foreign exchange market, inflation, fiscal deficit and stock market crash. The main advantage in buying crude from Iran is that its crude is economical than Saudi Arabia and Iraq, it gives 90 days credit to Indian OMC’s and it accepts some payment in rupee. This increase in crude oil import from Iran will cut down the current account deficit by another 8.5 USD billion.