Saudi Aramco attack: Impact on crude oil supply in India

September 20, 2019 3:32 AM

Crude oil reserves maintained in India by the Indian Strategic Petroleum Reserves Limited (ISPRL) for such contingencies are yet to reach their full capacity.

Saudi Aramco, Drone Attack in Saudi Arabia, Aramco Refinery attacked, impact on India, impact of Aramco attack on oil price, oil price India, UAE, Venezuela, Nigeria, Kuwait, Mexico, IEAIndia’s strategic reserves fall behind the IEA’s recommended 90-day limit

By Jay Cheema

Hostilities in Middle East geopolitics have caused anxious moments for India’s energy security scenario. The recent attack at the Saudi Aramco oil refinery has convulsed the crude oil market with partial cut down in supply and surge in prices. Saudi Arabia is India’s second largest oil supplier. The supply disruption caused by the attack may have a pernicious impact on India’s domestic supply and import bills.

Crude oil reserves maintained in India by the Indian Strategic Petroleum Reserves Limited (ISPRL) for such contingencies are yet to reach their full capacity. Further, India is diversifying its sources of crude oil imports as it is working towards arrangements with countries like Russia and Venezuela. While working towards strengthening its energy security, India also needs to focus on spreading out its oil and gas terminals to its relatively calmer eastern coastline as opposed to the more volatile western coast, resulting in our higher exposure to security threats.

Over 83% of India’s crude oil demand is met through imports. As per analysts, every dollar move in the Brent North Sea Crude prices adds a sizeable sum of $2 billion to India’s oil imports bill. As per the Directorate General of Commercial Intelligence and Statistics, Iraq is the largest crude oil supplier to India, followed by Saudi Arabia. Iran was the third largest crude oil supplier to India, but import of oil from Iran has been discontinued as a consequence of re-imposition of economic sanctions by the US. The other large oil suppliers include the UAE, Venezuela, Nigeria, Kuwait and Mexico.

Indian officials claim they have reviewed crude oil supplies and do not foresee supply disruption. India is making up for the supply it lost after discontinuing imports from Iran, and disruption in oil supply, if any, after the Aramco attack would add to its supply issues. Further, the surge in oil price will cause an increase in India’s import bills and pose the risk of weakening the rupee further.

To deal with disruptions, countries maintain strategic oil reserves for use. The International Energy Agency (IEA) advises to keep the equivalent of at least 90 days of net oil imports in strategic storage. In India, such oil reserves are maintained by the ISPRL, which maintains strategic reserves at its three facilities in Visakhapatnam, Mangalore and Padur. These reserves are in addition to the ones maintained by Indian refineries. But, as per reports, only 55% of the total capacity available at these facilities is under utilisation. Indian oil refiners hold reserves to meet the requirements of 15-20 days. India’s strategic reserves thus fall behind the IEA capacity recommendation and development of the same is the need of the hour.

While a major share of India’s crude oil imports is sourced from the Middle East due to its proximity, efforts to procure more crude oil from Russia and Venezuela are under way. India and Russia have entered into a non-binding cooperation agreement that reiterates the interest of Indian companies in the Vostok oil project.

Import of crude oil from Venezuela increased after India discontinued imports from Iran. But due to the imposition of sanctions from the US, a suitable payment mechanism needs to be formulated. The establishment of a rupee-based barter arrangement, similar to the one done in the past to import crude oil from Iraq during the war, and more recently with Iran, is being considered. Under such an arrangement, Venezuela will be paid in rupee in the branch of an Indian bank for its oil, while this money can be used by Venezuela to import food, medicines and other essential items from India.

India’s major oil and gas terminals are mostly located on the western coastline, and this makes India vulnerable to security threats from state and non-state actors. To mitigate the potential damage, ports along the eastern coast need to be developed. At present, LNG terminals on the eastern coast are being developed—the Ennore LNG terminal has been commissioned and the Dhamra terminal is still under construction. Investments are also being made for the development of terminals in Kakinada and Krishnapatnam.

As India looks at turning to Russia and Venezuela, it has to ensure it’s done in a cost-efficient manner, as these countries are not geographically proximate, unlike the Middle East.

The author is partner, Cyril Amarchand Mangaldas

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