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India's new oil-supply strategy

The arrival of the first shipment of US crude to the country signals a new era in US-Indian relations. It also sends a clear message to Opec that the world's third-largest consumer has other supply options

The arrival of the New Prosperity tanker into Paradip Port, in Odisha on India's east coast, at the beginning of October was a landmark moment for US-Indian bilateral relations. The 1.6m-barrel-cargo—bought by state-run Indian Oil Corporation—was the first shipment of US crude to arrive on India's shores.

The 2m-barrel capacity MT New Prosperity—which left the US Gulf Coast on 19 August and arrived at Paradip Port on 2 October, was to be processed at Indian Oil Corporation's east coast base refineries at Paradip, Haldia, Barauni and Bongaigaon.

The shipment is just the start of a two-pronged strategy by Indian firms to improve energy security as the country's demand increases while bargaining for a better deal.

Indian energy consumption has surged by around 6% per year over the past decade—and isn't about to slow.

With consistently high GDP growth—of around 7% for the past few years—the country's energy demand is set to skyrocket over the next few decades. BP expects the country's energy demand to rise faster than any other major economy between now and 2035—soaring by 128%.

A burgeoning population, rising incomes and a manufacturing expansion, coupled with booms in telecoms and automobiles, are set to continue driving demand for fossil fuels higher as the country seeks to extend electricity supply to its fast-growing population.

By 2040, India's oil demand will rise more quickly than any other country's, according to the International Energy Agency, soaring from 6m barrels a day now to 9.8m b/d. Opec also forecasts that the number of vehicles on India's roads will grow sevenfold, to 141m by 2030. Gas demand will also surge, hitting 72bn cubic metres a year by 2021, or average annual growth of 7%.

All this points to a sharp rise in energy imports.

India met around 82% of its total oil demand for the year 2016-17 with foreign crude, up from 81% in 2015-16 and 79% in 2014-15. Despite the collapse in oil prices, it still spent $70bn in 2016-17 on these imports, or about a fifth of its total import outlay. The 1.6m-barrel cargo delivered to India Oil Corporation in October is likely to be the first of many. The company said it has placed a cumulative order to import 3.9m barrels from the US.

Meanwhile other state-run refiners—Bharat Petroleum and Hindustan Petroleum—have also placed orders for 2.95m barrels and 1m barrels respectively for their Kochi and Visakhapatnam refineries on India's southeast and southwest coasts respectively.

Indian Oil Corporation said a total of 7.85m barrels has so far been contracted from the US by the three companies.

"The three refiners are sourcing sweet, sour and heavy crudes for their refineries which are equipped to handle complex mix of crude oils," Indian Oil Corporation said.

India now joins the likes of South Korea, Japan and China in looking westwards to meet its oil-import needs.

Diversifying supply

Improving India's energy security by diversifying sources of supply is a key motivation for taking a slice of US crude exports. India imports around 86% of its crude and 70% of its natural gas from Opec member states, according to the country's energy minister.

India has long complained about paying a premium for its imported crude from Opec members, compared with European and US importers. In May, India's minister of petroleum and natural gas, Dharmendra Pradhan told an Opec-India dialogue meeting in Vienna that the producer group should treat Asian buyers "as primary markets."

"(Opec's) strategy of incentivising Western markets in the past did not result in retaining those markets," Pradhan said. "However…don't subsidise others at our expense."

Pradhan added that he didn't "expect preferential treatment" for India, only that "we don't want to be treated unfairly."

The wave of cheap shale oil coming out of the Eagle Ford and Permian in the US is tempting Indian refiners. Next year US crude is expected to average 9.9m b/d according to Energy Information Administration estimates—a leap of 0.7m b/d above 2017's average.

Even after shipping costs are factored in, surging US crude output will continue to make it more attractive and cost-competitive for Indian importers.

Gas strategy

India's natural gas imports are also expected to surge. The country's liquefied natural gas imports should rise by 10% annually over the next few years, surpassing 30m tonnes a year by 2020, compared with 19m t/y in 2016. Although the government's policy is to reduce its total energy imports, economic growth, combined with India's climate-change policies, and the plans to electrify both the country and its transport segment, will inevitably yield more demand for cleaner-burning natural gas.

GAIL India signed a contract to import 5.8m tonnes of LNG from Cheniere Energy, over the next 20 years—first supplies are scheduled to arrive early 2018. More recently the company sought to renegotiate the terms of the contract closer to prevailing spot prices. The Indian firm successfully renegotiated its RasGas contract with Petronet and recently did the same with ExxonMobil to bring gas from Australia.

The country's LNG imports have surged from 14.4m tonnes in 2014 to 19.6m tonnes in 2017.

Wood Mackenzie, a consultancy, forecasts India's gas market will grow at around 7% per year between now and 2025.

Asian LNG prices surged at the beginning of November, according to commodities pricing agency Platts, bolstered by higher regional, seasonal demand and stronger Brent crude prices—which pushed oil-linked supply contracts higher.

If Brent futures rise above $66 a barrel Wood Mackenzie sees LNG being more competitive with other oil-derived fuels, such as petroleum coke and fuel oil. It will certainly make US gas imports look more attractive to Indian buyers.

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