Blog Details

India’s endless struggle for crude oil security

• During the ongoing decade 2011-2018, the Indian economy added an average US$ 135.5 billion annually – just US$ 11.5 billion lower than the decadal growth in 1991-2000.
• Higher economic activities invariably necessitated greater demand for energy at all levels; primary energy consumption quadrapled from 191 million tonnes of oil equivalent (MTOe) in 1990 to 809 MTOe in 2018. 
• During the period, domestic oil production crippled from 34 million metric tonnes (MMT) to 40 MMT and refinery capacity increased from 1,122 thousand barrels per day (KBPD) to 4,972 KBPD. 
• Due to paucity of supply, India’s struggle for crude oil dependence will continue for a longer period of time. Diversification of crude sourcing mix offers opportunity to mitigate risk of concentrated market power.

India’s economic progression since 1990 has been sharper than ever before. During, 2000-2010, the Indian economy added US$ 1.2 trillion compared to US$ 147 billion in the previous decade. During the ongoing decade 2011-2018, Indian economy added an average US$ 135.5 billion annually – just US$ 11.5 billion lower than the decadal growth in 1991-2000. Economic transitions fueled by reforms – globalization, liberalization, and privatization – supported domestic production and consumption.

Higher economic activities invariably necessitated greater demand for  energy at all levels; primary energy consumption quadrupled from 191 million tonnes of oil equivalent (MTOe) in 1990 to 809 MTOe in 2018. During the period, domestic oil production crippled from 34 million metric tonnes (MMT) to 40 MMT and refinery capacity increased from 1,122 thousand barrels per day (KBPD) to 4,972 KBPD.

Rising oil consumption and domestic oil production – lower than the expected level resulted in escalated crude imports. Multiple factors including commercial and geo-political, influence selection of crude sourcing decision. In 1999-2000, India’s top destinations for crude sourcing used to be Nigeria,  Saudi Arabia, United Arab Emirates, Kuwait, Iran, Malaysia, Egypt, and Iraq.  Now, Iraq and Saudi Arabia occupy the top two positions in terms of crude supply to India. Over the years, India’s crude purchase bucket widened; currently it includes about 45 countries compared to 15 countries in 1999-2000.

India has been heavily dependent on Middle-East for securing its crude import. In 2018-19, India sourced 143 MMT of crude oil from the Middle-East, just over 63% of its total crude import of 226 MMT. Despite all global geo-political developments, Saudi Arabia and United Arab Emirates (UAE) remain as the most reliable suppliers of crude oil import to India.  In 2018-19, with 57.8 MMT, both Saudi Arabia and UAE contributed around 40% of India’s crude import from the Middle-East. Iran and Iraq faced the wrath of the United States – the world’s most powerful economy, at different points in time. Similarly, Venezuela – having the richest petroleum reserves (48 billion tonnes) – faces political turmoil on a continuous basis, resulting in sub-optimal oil production. Imposition of sanctions by the US on Venezuela’s state oil company – Petróleos de Venezuela, government, and central bank are some of the reasons behind declining oil production in Venezuela. The USA’s oil embargo blocking purchase of crude from Petróleos de Venezuela not only hurts Venezuela, but also oil buyers. European Union’s recent sanction against Venezuela further complicates the matter.

Iraq

India’s old friend Iraq toppled Saudi Arabia as the largest supplier of crude oil in 2017-18. Post the Iraq war, New Delhi has been playing its role in the rebuilding of Iraq, with significant focus on providing necessary assistance in terms of improving quality of life in the country. Owing to US invasion of Iraq in 2003, economic and trade relations between India-Iraq suffered heavily. After significant recovery, the war-ravaged Iraq improved its economic and trade activities with India. Iraq’s exports to India reached US$ 22.37 billion in 2018-19 compared to a modest US$ 2 million in 2005-06. Import of crude oil constitutes 92.5% of the total India-Iran bilateral trade.

India’s trade with select countries in 2018-19
Value (million US$) Export Import Total trade Trade balance Crude import Crude import share
Iraq 1,789 22,372 24,161 -20,584 22,265 99.52%
Iran 702 13,526 14,228 -12,823 12,111 89.54%
Saudi Arabia 5,562 28,479 34,041 -22,917 21,381 75.08%
UAE 30,127 29,785 59,912 341 9,512 31.94%
Russia 2,389 5,840 8,229 -3,451 1,181 20.22%
USA 52,406 35,549 87,956 16,857 3,589 10.10%
Venezuela 165 7,259 7,424 -7,094 7,248 99.84%
Angola 282 4,027 4,309 -3,745 3,282 81.51%
Brazil 3,800 4,406 8,206 -606 1,596 36.23%
Algeria 940 1,697 2,637 -757 1,206 71.08%
Total 98,162 152,941 251,103 -54,780 83,372 54.51%

Saudi Arabia

In 2018-19, India-Saudi Arabia bilateral total trade valued at US$ 34 billion, to which Indian export and import contributed 16% and 84% respectively. India’s trade deficit amounting to US$ 22.9 billion with Saudi Arabia is a concern but it provides crude oil supply comfort. It is expected that in the near future India’s oil dependence on Saudi Arabia would increase, thereby widening the trade deficit. Currently, only ‘cereals’ exports touch the US$ 1 billion mark to Saudi Arabia. India must explore avenues for enhancing exports of vehicles, articles of steel, copper, iron, ceramic products, apparel & clothing, man-made staple fibers, organic chemicals, and petrochemicals to the Saudi Kingdom.

Iran

Iran – a conventional ally and friend of India has been facing sanctions from the US. The 2nd largest supplier of crude in 2018-19 will be gradually taken off the crude basket. Iranian crude import volume and value have come down to 1,974 thousand tonnes and US$ 995 million respectively in April-August 2019. Loss of Iranian crude could be compensated by sourcing from US, Russia, Iraq, and Saudi Arabia.

UAE

UAE is the largest trading partner from Middle-East with total bilateral trade of US$ 59.9 billion with India. It is one of those countries where India enjoys a slender trade surplus. Crude import is only 16% of total trade and 31.94% of the total import from UAE.  So, India’s trade engagement with UAE is more than oil trade. UAE is moving towards a service economy, where India can play an important role.

Beyond Middle-East: USA and Russia

India’s struggle for crude oil independence will continue for a longer period of time as import dependence remains central cause of concern. Ensuring mitigation of supply risk seems to be a choice better suited for the time being. Even construction of strategic petroleum reserves only can de-risk for a limited period. Rather than worrying about domestic crude oil supply scarcity, the government and refiners are looking for sweet deals to ensure stable supply from international market.

Diversification of crude sourcing mix offers opportunity to mitigate risk of concentrated market power. Market structure and dynamics indicate that to a greater extent Indian consumers have begun to strengthen ‘buyer power’ (refiners). Due to improvement in technology, logistics, and gain in learning experience, the refiners are in a better position to derive value from the crude oil available across the globe. Hence, today ‘Maya’ crude and Russian crude make economic sense to Indian refiners. Higher crude import from the USA is bound to improve India-US bilateral trade ties. Similarly, Russians investing in the oil & gas sector in India would certainly bring more crude to the country. These two new sources could reduce the overdependence of India on any crude supplier.


Sanjay Kumar Kar, Associate Professor,  Department of Management Studies, Rajiv Gandhi Institute of Petroleum Technology.


Rohit Bansal, Assistant Professor,  Department of Management Studies, Rajiv Gandhi Institute of Petroleum Technology.

 

0 0 vote
Article Rating

guest
0 Comments
Inline Feedbacks
View all comments