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Press Release [FREE Access]
Petro Intelligence » Dilemma Over Deep Discount Offer On Russia Crude

By R. Sasankan

The Ukraine crisis has thrown up a number of challenges for emerging markets like India: supply chain disruptions, the scary prospect of runaway inflation, and a mad scramble to find quick-fix solutions to a plethora of problems.

It has also presented a dilemma for the Narendra Modi government which has tried to stay in neutral during this tense dispute between Russia and Ukraine during which leaders around the world have come under pressure to choose which side they wish to support. It is hard to maintain a balancing act on a tripwire where a slight lurch in one direction or the other could have serious repercussions on diplomatic and economic relations with the rest of the world.

The Government of India – which has been wrestling with its own problems in dealing with the surge in crude oil prices – stands on the brink of a serious quandary as it considers an overture from the Russian regime in the shape of an offer to supply price-discounted crude to India to help it tide over a looming crisis. Petroleum minister Hardeep Singh Puri and finance minister Nirmala Seetharaman had confirmed last week that India had an offer from Russia and it was under consideration. Immediately after, Indian PSUs such as IOC, BPCL and MRPL started buying Russian crude which is available at a discounted price in the market. This is not a special package designed for India, but normal buying in the market.

The Russian offer is admittedly very tempting. India has a huge oil import bill as it sources almost 85% of its energy needs from overseas markets. The West has hit Russia with a number of economic sanctions – but stopped short of banning imports of Russian crude. This is where pragmatism takes over: Europe needs Russian oil and gas; and the US is only too keenly aware that a clamp down on Russia oil will send prices skyrocketing and have grave consequences for their economies which are slowly limping out of the Covid-induced crisis.

In one sense, there is no real bar on India accepting price-discounted crude from Russia. But any move for a special deal with Russia can send out the wrong signals to the West which is already upset with India for failing to take an unequivocal stand on the Russian aggression in Ukraine. India could anger the West if it succumbs to the Russian overture – and they could put the squeeze on India in some other area.

Global oil giant Shell found itself if a similar predicament recently: it decided to pull out of Russia but then opted to purchase Russian crude, which angered the west. To head off the possibility of concerted action from these nations, the company said it would offer any profit that it made on the oil deals with Russia to Ukraine.

India needs to consider the Russian offer carefully but ought not opt for the discounted crude package until the Ukraine crisis has completely blown over. It can opt to buy crude from the international markets where the prices have fallen to around $ 100 a barrel after rising alarmingly to over $ 140 at one stage.

The Modi government handled the initial phase of the Ukraine crisis remarkably well. It refused to condemn the Russian invasion of Ukraine, which was perfectly in tune with India’s national interests. Ukraine is strategically very important for Russia’s security. Russia has good reason to remain alert to what happens in Ukraine just as India feels the need to closely monitor developments in its neighbourhood.

The erstwhile Soviet Union had strongly backed India when it decided to support the liberation struggle in Bangladesh and the subsequent war with Pakistan, especially when the US government led by President Nixon tried to frighten India by sending its 7th fleet to the Indian Ocean. India still depends heavily on Russia for its defence equipment. This is precisely why even President Joe Biden opted not to chide India for its refusal to condemn the Russian invasion of Ukraine.

But that is where the US will draw the line. The US will be hugely miffed if India accepts the specially discounted crude package from Russia. Ever one knows that crude oil is the Achilles heel of the Indian economy. However, the West will be less than sympathetic if it buckles and accepts Russia’s offer of cheap crude.

“India is in a very difficult situation. It cannot afford any misstep. This is not the time to worry about small gains in the oil and gas sector. The stakes are much higher. Israel is proactively involved in a shuttle diplomacy between Moscow and Berlin. India's interests lie in quickly resolving the dispute,” said an acknowledged expert. He believes the West can retaliate in several ways if India wavers now.

“I believe India should not jeopardise its carefully-balanced diplomatic posturing now by opting for discounted crude from Russia. It would also be prudent to avoid third party purchases of crude from countries like Iran, assuming that the US suddenly decides to lift the sanctions against Tehran”,said an acknowledged expert.

There is a lot at stake for India. The Modi government should instead focus its attention on trying to resolve the conflict instead of looking to derive benefits from it.

Russia ranks among the top three crude oil producers of the world. But its contribution to India’s crude requirement has been marginal, ostensibly because of the high cost involved in transporting crude all the way from Russian ports. This argument is somewhat puerile: the ‘distance’ argument is posited by people who either have no understanding of the manner in which oil is traded around the world or have a sinister motive to persist with oil purchases from the Gulf nations.

Technically, India could work with oil and LNG importers from Japan and South Korea and ensure that shipments from East Coast of Russia purchased by India are delivered to Japan and South Korea. As a quid pro quo, Japanese and South Korean purchases from the Middle East could be delivered to the Indian West Coast or even the Indian East Coast. India, South Korea and Japan can all benefit this way. This sort of swapping arrangement is quite common in the oil business.

So, why is the mischievous argument being made at all? The sad truth is that crude oil import into India is enmeshed in all sorts of shenanigans. Right from the 1970s, crude imports have been seen as a source of funds for the ruling political party. Kickbacks in these deals are common and the beneficiaries of the payoffs have included certain ministers and senior bureaucrats of the state-owned oil companies. The big bucks that these worthies received provided the necessary grease to keep this sinister ploy in operation over the years.

The quantum of kickbacks is quite high in LNG deals. The Soviet Union was not good at the art of bribing. The Asian premium that the Middle Eastern suppliers charged from India is believed to stem from this graft-ridden culture.

These are some of the reasons why Russia has never been seen as anything more than a bit player in crude oil supplies to India.

The Indian government needs to seriously reconsider its crude procurement strategy once the Ukraine crisis ends. India can -- and should -- turn to Russia as a major source of supply in the post-Ukraine crude market. Indian Oil Corporation started buying crude from Russia only a couple of years ago and the quantity has been limited to 2 million tonnes per annum. Russian crude, which has been found to be suitable for IOC’s refineries, is compatible with other refineries as well. In fact, PSUs such as BPCL and HPCL have been making market purchases of Russian crude as part of their normal trade.

The deep discount on Russian crude will only be a short-term arrangement, prompted by the situation in which Moscow finds itself as a result of the tense stand-off on Ukraine and the resultant economic sanctions. A long-term arrangement can be worked out after the international situation normalises.

Meanwhile, the political leadership in the ministry of petroleum and natural gas, which is relatively new and credited with a clean image, should initiate measures to ensure that the kickback culture that throttles crude oil imports in this country is totally eliminated.



To download the latest issue 'Volume 29 Issue 3 - May 10, 2022', click here
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