Swap deal may bring better realisations for Cairn India

Written by Pranav Nambiar | New Delhi | Updated: Nov 24 2013, 00:28am hrs
Cairn India could realise around $10/barrel more on crude oil sales through a proposed swap arrangement, whereby Cairns Rajasthan (Barmer) crude oil contracted to public sector refiner IndianOil (IOC) will be exported. IOC, on the other hand, will import a better suited imported crude in place of the waxy Barmer crude.

Cairn India CEO P Elango, in a recent analyst call, said that the company is working with the government on a proposal that would allow at least on an initial pilot basis the swap of the Barmer crude to ensure that the nominated public sector refiner gets the best value.

Sources say that at present, the Barmer crude oil is being sold at an 8-13% discount to Brent, while Cairn expects a lower discount to Brent in the international markets such as Singapore or Japan. For example, if Brent is trading at $100/barrel, Cairn would fetch around $87/barrel in India, while it would realise around $97/barrel in international markets. Brent is currently trading at around $110/barrel.

An oil ministry official said that IOC is unable to fully utilise the low-sulphur crude and high-wax crude oil being produced at Barmer as its refinery configurations restrict them from processing all varieties of crude. IOCs Koyali and Panipat refineries are fed by Cairns crude from Barmer. IOC needs to blend other crude with the waxy crude from Barmer to process it.

The Panipat refinery with a 15 million tonnes per annum (mtpa) capacity was set up in 1998, while the Koyali refinery which was set up in 1965 has a capacity of 13.7 mtpa.

The idea is to extract best value from the available crude. The initial reaction from the government has been positive, said the Cairn official.

Cairn feels that the government has received the idea well because any additional dollar per barrel realized is going to benefit all the parties involved, the transaction can be conducted in a transparent manner by involving IOC, and the government gets to know what is the true international market price for the Barmer crude.

At present oil extracted from India is not permitted to be sold in overseas markets and the crude sold in domestic markets is benchmarked against the Brent.

Cairn CEO Elango said that normally when the Brent price is higher, the difference between low sulphur and high sulphur crude narrows. The discount to Brent goes down when the Brent crude oil price is lower end and it goes up when the crude oil price moves up. It is a way the crude oil market reacts.

Cairn produces 1,75,000 barrels of oil a day in Rajasthan. Apart from IOC, Barmer crude is sold to Reliance Industries Jamnagar refinery and Essar Oils Vadinar refinery.