Review oil import contracts with Saudi: India tells refiners

Govt has told IOC, BPCL and HPCL to look for oil supplies from outside the Middle East region and use collective bargaining power to get favourable terms

New Delhi: Amid tensions with Saudi Arabia over oil production cuts, India has asked its state refiners to review contracts they enter into for buying crude oil from the Middle East nation and negotiate more favourable terms, a top official said.

Keen to break producers cartel dictating pricing and contractual terms, the government has told Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) to look for oil supplies from outside the Middle East region and use collective bargaining power to get favourable terms.

India imports 85 per cent of its oil needs and is often vulnerable to global supply and price shocks. When oil prices started to rise in February, it wanted Saudi Arabia to relax output controls but the Kindgom ignored its calls. This has led to the Indian government now pressing for diversification of the supply base.

“Traditionally, Saudi Arabia and other OPEC producers have been our mainstay suppliers of crude oil. But their terms have often been loaded against the buyer,” the official with direct knowledge of the discussions said.

For one, Indian firms buy two-third of their purchases on term or fixed annual contracts. These term contracts provide assured supplies of the contracted quantity but the pricing and other terms favour only the supplier, he said. “While buyers have an obligation to lift all of the contracted quantity, Saudi and other producers have the option to reduce supplies in case OPEC decides to keep production artificially lower to boost prices. Why should the consumer have to pay for decisions of OPEC? If we commit to off-take, they should also supply no matter what,” he said.

More importantly, the buyer has to indicate at least six weeks in advance of their intention to lift quantity out of the annual term contract in any month and has to pay an average official price announced by the producer. “In an ideal market, the pricing should be of the day when the loading is taking place. That way we can get the advantage of any drop in international oil rates. But that is not the case. They (Saudi and other OPEC suppliers) insist on selling at their official selling price only,” the official said.

To begin with, Indian refiners will look to reduce the quantity they buy through term contracts and instead buy more from the spot or current market. Buying from the spot market would ensure that India can take advantage of any fall in prices on any day and book quantities. “It’s like stock market. You would want to buy shares on a day or time when the prices are low. So is the case with crude oil – we would want to buy when we see there is a drop. Term contracts devoid us of that flexibility,” he said.