Public sector oil refiners Indian Oil, Bharat Petroleum, Hindustan Petroleum and Mangalore Refinery are likely to overhaul their crude procurement process, a move that could make them more competitive and help cut the country’s oil import bill by about $3 billion a year, reports Siddhartha P Saikia in New Delhi. India’s crude oil import bill touched $143 billion in 2013-14 up from $100 billion in 2010-11.
“The government along with the companies are working to put in place an ‘integrated trading desk’ model and to do away with the tendering mechanism of procurement,” senior officials privy to the development told FE.
IOC, BPCL, HPCL and MRPL buy nearly 70-75% of their crude oil requirement via long-term deals, while the balance 30-35% is sourced from the spot market, costing premium.
The new model, already practised by global firms and private Indian refiners, could help crude oil cheaper by nearly $3-5/barrel. Considering all the PSU refiners together process more than 132 million tonnes of crude oil every year, this could save about $2-3 billion a year, say analysts.
The new mechanism would help to purchase crude oil through non-tender route, as the current process is longer and expensive. The integrated trading desk would be the platform to negotiate directly between the buyer and seller and also capture market opportunities such as buying distress cargoes.
Petroleum secretary Saurabh Chandra is believed to have discussed in detail the new procedure with the PSU firms before it is sent for the approval of petroleum minister Dharmendra Pradhan.
The tender route approach for spot procurement currently adopted by PSUs restricts opportunities for quick decision making for buying and selling cargoes on perceived advantage. The trading desk approach involves traders continuously talking to market participants during the entire day. As and when opportunities arise, the traders can finalise deals without calling for tenders, said the official quoted above.
The petroleum ministry may hire an international consultant with experience in setting up of trading desks to do the same for the PSU refiners. It is learnt that Malaysia-based Petronas has adopted this route for setting up its trading desk, Private refiners such as Reliance Industries and Essar Oil have also adopted this route.
In May 2013, the Parliamentary Standing Committee also pointed out the need for a better crude oil procurement mechanism. It said that PSU refiners should be given flexibility to carry out negotiations including pricing, hiring ships and better terms on freight. In addition, the petroleum ministry should allow PSUs to procure a certain percentage of their annual crude requirement through the distress sale route, the committee recommended.
In the current mechanism, the PSU refiner would float the tender, receive offers, seek clarification, evaluate them and approve the buying. This entire process takes about a week’s time. In addition, the seller adds a premium to such bids to take care of the price volatility exposure, said an official at one of the refiners.
On the other hand, international companies, RIL and Essar Oil make purchases of crude oil through a trading desk. “In a trading desk, price negotiations can be held with L-1, L-2 and so on. In the case of PSUs, negotiations are not allowed with other than L-1, which is known to the party,” said the refinery official.