Refiners turn to heavier crude to boost margins, insulate against shocks

Written by Siddhartha P Saikia | New Delhi | Updated: Apr 14 2014, 18:15pm hrs
RefinersVenezuela, Brazil, Colombia, Azerbaijan and Algeria emerged as exporters to India over the last three to six years. (Reuters)
The countrys relatively new public sector and private petroleum refineries, looking to improve margins, have in recent years stepped up sourcing of heavier blends of crude, which has reduced the relative share of Brent crude in domestic oil imports.

The trend, so far most visible in the rise in Indias oil imports from South America, especially Venezuela, is expected to extend into the coming years, going by the term contracts being signed and the buzz in the spot markets.

More regions other than the Gulf countries, conventionally Indias biggest oil supplier, are getting to export heavier varieties of crude oil to India, as companies are eager to recover the capital investments in their modern refineries expediently.

Indian refiners including state-run Indian Oil Corporation as also Reliance Industries and Essar Oil are now importing crude oil from a new set of supplier countries such as Colombia, Ecuador, Panama, Algeria, Cameroon, Congo, Guinea, Azerbaijan and Sudan, while their imports from countries such as Venezuela, Brazil, Mexico, Angola and Brunei have increased in the past two to three years.

The share of African and South and Central American countries in Indias crude imports have risen from less than 20% in 2008 to about 30% now.

South Americas own share more than doubled in the period to 30 million tonnes (mt). This is even as Indias overall oil imports have increased from 122 mt in FY08 to 185 mt in FY13 (during April-February FY14, the figure stood at 175 mt).

Some of the Indian refiners such as RIL and Essar Oil have high refinery complexity index and can process heavy grade crude as well. These factors have encouraged them to buy less-expensive oil available from South and Central American countries. Many refineries including IOC have also upgraded their existing refineries to handle the heavier grades of crude oil, said Manish Aggarwal, partner at KPMG in India.

Heavier blends of crude trade at a discount to lighter grades (up to 12-13%), such as Brent, prompting refineries to import heavy and ultra-heavy grades to improve margins. Recently commissioned Indian refineries including those that have had upgrades have high levels of complexity (high Nelson Index), making them capable of processing heavier blends.

Venezuela, Brazil, Colombia, Azerbaijan and Algeria emerged as exporters to India over the last three to six years. Imports from Australia, though in small quantities, have been done in the last two to three years. Refiners are buying these crude oil varieties through the spot market or short-term deals. The long-term deals (which account for 75% of overall purchases) have been mostly with West Asian oil exporters and this could also now see a change. In 2008, India imported more than 70% of its crude oil from West Asian countries, and this is now hovering around 55-60%.

What adds to the notion that Indias crude sourcing is bound to diversify is the setting up of modern refining capacities in recent years and plans to add more capacity.

It is imperative for Indian refiners to diversify crude sourcing considering geopolitical risk as well as to utilise price arbitrage between heavy source and light sweet crude. Indian refineries with high complexity have the flexibility to diversify and source different kinds of crudes including heavier and more sour grades. The trend of increase in sourcing from Latin America and Iraq may continue, said Kalpana Jain, senior director, Deloitte in India.

At present, the country has 22 refineries with a total capacity of 215 million mt. In FY15, IOC is likely to commission a 9-mtpa greenfield refinery at Paradip in Odisha, while two other state-run refiners, BPCL and HPCL, recently opened greenfield refineries of 6 mtpa in Bina and 9 mtpa in Bathinda, respectively (HPCLs is a joint venture with Mittal Energy).

In 2008, private sector Essar Oil commissioned a 10.5-mtpa refinery in Vadinar, which was taken to 18 mtpa in 2012 and further to 20 mtpa now. In the brownfield segment, IOC, which had commissioned its 3-mtpa refinery at Koyali in Gujarat in 1965, has upgraded it to 13.7 mtpa. Similarly, its Panipat refinery capacity was expended to 15 mtpa.

As for projects in the pipeline, BPCL is planning to expand the capacity of its Bina refinery to 8.85 mtpa and that of Numaligarh refinery to about 9 mtpa from 3 mtpa now. IOC too plans to take the capacity at its Koyali refinery to 18 mtpa and that in Panipat to 21 mtpa. Essar Oil is learnt to have plans to ramp up the Vadinar refinery capacity to 40 mtpa. IOC is also planning a new refinery on the West Coast.

There is a gradual shift towards procuring heavier crude oil, said a senior official at IOC, the countrys largest refiner. RIL and Essar Oil did not respond to queries seeking their comments on crude sourcing.

Since the decline of demand for crude oil in the US due to the shale oil/gas advent, many global suppliers are now offering discounts to Asian buyers including India. Colombia, for example, has of late offered a discount (on FOB basis) to Indian traders of $ 14-16 per barrel against the Brent crude price. The factors that influence the discount rate are heaviness of the crude (lower API gravity), sourness (high sulphur content) and the crude assay (yield potential).

Recently, West Asia and some parts of Africa witnessed uprisings that had created supply disruptions. Also, when the US pressed for extensive trade sanctions on oil exports from Iran, it was difficult for Indian refiners to swiftly change their sourcing pattern as some refineries such as Mangalore Refinery and Petrochemicals, Essar Oil and HPCL had substantial imports of crude oil from Iran. These have also encouraged the sourcing diversification drive, analysts said.

In the event of geopolitical tension, exporting country may increase oil prices. In such a scenario, higher crude oil prices will lead to a spike in oil import bills. For a country like India dependent on imported crude, this can have adverse macroeconomic consequences, said KPMGs Aggarwal.

India is the fourth-largest consumer of energy after China, the US and Russia. Oil and gas accounts for 39% of Indias primary energy consumption. Oil constitutes 34.4% of Indias total imports and 20% of the countrys total exports. From FY09 to FY13, consumption of petroleum products increased at a CAGR of 3.7%.