by R. Sasankan
In
the rough and tumble world of petroleum, the two snippets of
information may not have created much of a stir. For the first time,
Indian Oil Corporation (IOC) has bought a cargo of US crude for delivery
in October 2017. Bharat Petroleum Corporation Ltd (BPCL), another
state-owned company, has struck a similar deal. In a country that
imported as much as 213 million tons of crude in the previous financial
year and ranks among the top three crude importers in the world, it is
but natural that the import of a couple of cargoes from the US would not
have attracted great attention.
But the significance of the US deal lies in the fact that this would not
have happened without the knowledge of Prime Minister Narendra Modi or
his office. It may sound ridiculous to suggest that the Prime Minister
of such a large country would be deeply interested in such trifles,
especially when global crude prices are so low.
Modi
visited the US only a few weeks ago and had extensive discussions on
energy matters with President Donald Trump who made no secret of his
interest in selling US LNG to gas-starved India. But crude travels
faster than LNG. The crude deal serves the strategic interests of the
country, as perceived by Modi. It is path breaking because there cannot
be any kickback in the purchase from the US.
This could be the biggest blow to Middle East suppliers who have tacked
on a charge, widely known as the Asian Premium, on crude supplies to
Asian countries, more particularly India. Till now, India has paid the
charge without demur. One reason for this was that it was an elaborate
device which had a built- in component to route kickbacks to the ruling
dispensation in these countries.
Since
the 1970s, the petroleum sector emerged as the single biggest source of
finance for the political party in power in India. The ruling
combination may have changed at the Centre but the main source of
revenue remained intact.
Be it the Congress or the United Progressive Alliance (UPA) led by it,
the National Front headed by H.D. Deve Gowda or the National Democratic
Alliance (NDA) under A.B. Vajpayee, the petroleum sector remained a top
priority area in their scheme of things. Prime Minister Deve Gowda kept
the petroleum portfolio with himself. Vajpayee, as NDA Prime Minister,
had to appoint Jayalalitha’s nominee Vazhapadi Ramamurthy as petroleum
minister in his cabinet. Ramamurthy, a solitary MP from a breakaway
faction of the Congress who was elected with AIADMK support, failed to
honour his commitment to Jayalalitha on the periodic flow of monetary
contributions to her party. Jayalalitha was furious and demanded his
sacking. Vajpayee refused to oblige and the rest is history.
Crude
oil scandals have roiled several governments. The first major economic
scandal related to crude oil erupted in early 1980s when the details of
the Kuo Oil deal spilled out into the open and rocked Indira Gandhi’s
government. In many ways, the disclosures stemming from this deal
necessitated the creation of a sophisticated mechanism for mobilizing
funds from petroleum deals for the ruling party.
The Asian countries are economically backward when compared with the US
and Europe. If anything, they should have been asking for a discount on
not agreeing to pay a premium on crude oil imports. But the Middle East
suppliers preferred to charge an Asian premium on crude, which had a
logic of its own.
This column is not expected to be a study on the Asian Premium. For the
benefit of our readers, I would like to say that the Asian Premium is a
mixture of many things: competitive advantage in lower shipping costs
and available low cost export infrastructure, a lack of an Asian spot
market and the pernicious system of kickbacks. It gradually degenerated
into a racket to keep the political dispensations in good humour. The
scale of the kickbacks, which permeated almost every level of the
governance system, prevented the Asian spot market from becoming a
reality.
The
first protest against the Asian Premium was articulated by Mani Shankar
Aiyer, the petroleum minister in the Manmohan Singh-led government. But
he gave it up mid-way, obviously under the advice of his political
bosses. The present petroleum minister, Dharmendra Pradhan spoke against
the Asian Premium at an OPEC meet June 3, 2015.
The market forces have started to erode the Asian Premium, especially
now when there is a glut in the crude oil market. The very fact that the
Indian PSUs have entered the US market to buy crude is the clearest
indication that the kickback component is no longer important in the
present scheme of things.
Of course, this does not mean that the Asian Premium is going to
disappear. But the best guarantee against the Asian Premium lies in the
diversification of crude supplies. The US’ entry as a crude supplier
will bring in greater transparency in the oil trade. Russia’s Ural
crudes have also entered the Indian market. The Russians, however, have a
flexible approach towards business promotion incentives.
To download the latest issue 'Volume 30 Issue 23 - March 10, 2024', click here |