India?s import of energy often faces price, supply and exchange rate shocks. The latest crisis?Iran?s threat of blocking the traffic through the Strait of Hormuz in retaliation for the latest US trade and financial sector sanctions?has led to the possibility of crude oil

supply disruption for India. FE examines the issue.

How much of crude oil supplies to India pass through the Strait of Hormuz?

Roughly half of India?s 164 million tonnes of crude oil imports pass through the Strait of Hormuz. Although India imports oil from across the globe, Middle East suppliers like Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates and Qatar account for more than half of the total imports that rely on this route. The rest comes from suppliers in Africa like Angola, Nigeria and Egypt, plus South American producer Venezuela and Asian supplier Malaysia.

Can Saudi Arabia, India?s largest crude oil supplier, ship oil through the Red Sea and avoid the risks in the Strait of Hormuz?

Saudi Arabia, the second largest oil producer after Russia, accounts for 17% of India?s total crude oil import and for more than one-fourth of supplies to Indian shores from the Middle East. Dave Ernsberger, global director of oil at energy information provider Platts, told FE that Saudi Arabia would certainly seek to maximise the use of its 745-mile East-West Pipeline, which has a nameplate capacity of 5 million barrels per day, to try and export as much of its Persian Gulf crude through the Red Sea as possible. The 290,000 barrels per day Abqaiq-Yanbu natural gas liquids pipeline, which parallels the East-West Pipeline, as well as the Iraq-Turkey pipeline to the port of Ceyhan on the Mediterranean Sea, could also help relieve some of the pressure on the Persian Gulf. But even with all these options, alternative routes could barely replace about 30% of the total 17 million barrels of total crude oil exports that pass through the Strait of Hormuz every day, says Ernsberger.

Can India source more crude oil supplies from other countries that are not affected by the tension in the Strait of Hormuz?

India could step up imports from other suppliers such as Russia, that presently account for only a small fraction of the country?s total imports. Despite being the largest oil producer, Russia presently supplies only about 2 million tonne of oil to India. India could also source supplies from European nations like the UK, Norway, Denmark, Germany and the Netherlands that control the oil resources in the North Sea. Experts say that potential suppliers to India include those in the North Sea, the Mediterranean, Latin America and parts of Southeast Asia. They also see a larger role for West Africa as an alternative supplier if the Strait of Hormuz is closed. Africa presently contributes about a fifth of India?s crude oil imports. If other nations like South Korea, Japan, the US and China too approach West Africa for alternative supplies, India?s chances of sourcing more from there would suffer.

If crude oil prices shoot up due to supply disruptions in the Strait of Hormuz, how would this impact

India?s oil marketing companies and consumers?

Executives at India?s refinery-cum-retailers such as IOC, HPCL and BPCL say that for every increase of crude oil price by a dollar, the under-realisation in retail price of finished products in the price-controlled local market would go up by R3,500 crore. This includes losses in diesel, LPG and kerosene. For a nation that imports 80% of its crude oil requirement, the other major risk emanates from the rupee-dollar exchange rate. If the rupee weakens against the greenback by one rupee, the under-recovery on retail sales would go up by R8,000 crore. Political leadership in India is worried about a scramble for the dollar if Europe?s sovereign debt crisis deepens further, making the dollar-denominated crude far more expensive. These two risks could force the government to further raise the retail price of fuel as its

finances are already under pressure due to high subsidy outgo and less-than-expected revenue receipts. At current prices and exchange rate, oil retailers are expected to incur an under-recovery of R1,40,000 crore even after mid-year duty cuts and price revisions.

What is the level of strategic storage capacity that India

has at present?

Oil company officials say that using all the fuel in their inventory and in the supply chain, they can maintain retail supplies for about a month without any disruption even if all the crude oil supplies are blocked. They add that even if the tension in the Strait of Hormuz leads to a halt in traffic along the route, it can only make oil costlier for India and will certainly not reduce supplies as the country can buy more from its other trade partners. India is now building an underground strategic storage capacity of 5.33 million tonne of crude oil and is planning to set up

another 12.5 million tonne capacity by 2020. While producer nations do not object to such storage capacity being used to ensure steady supplies, they tend to make supply cuts if these are used as a price negotiation tool. Experts say that the current crisis highlights the fact that India?s oil supplies are vulnerable to the tensions in and around the Middle East, and that alternatives are both limited and troubled by competition from other major importing nations.

Will power and fertiliser firms using imported liquefied natural gas suffer if delivery is affected?

Unlike crude oil, India imports only about a fifth of its natural gas requirements, with LNG imports accounting for around 9.8 million tonne in 2010-11. Spot LNG now fetches $15-16 per million metric British thermal units (mmBtu) in global markets, 3-4 times the domestic price of $4.2-5.7 per mm-Btu. Greater reliance on LNG would push up costs and in the case of urea producers, the government will have to give more subsidy as this fertiliser is still under price control. Power producers, who sell energy at regulated prices, will come under margin pressures. With domestic production of gas declining and fresh investments flowing into LNG re-gasification terminals, India would be depending more on imports in the coming years, exposing it more to the volatile situation in global gas market.