India weighs new oil manoeuvre as old routes get jammed

With Iran-linked energy chaos showing no signs of abating anytime soon, India is doubling down on its efforts to find other oil & gas channels to make sure its factories, vehicles, homes and the broader economy keep running without glitch.

India will be hosting the foreign ministers of Iran, UAE, Oman, Yemen and other Indian Ocean Region (IOR) nations this month amid supply-related problems arising from the Iran war. ET reported on November 3 that the meeting will likely focus on "predictable supply chains and the smooth flow of commerce" amid the ongoing disruptions.

Freedom of navigation in the Strait of Hormuz and Bab-el-Mandeb Strait will also be on the agenda. There are indications that India may lead an effort at the meeting to find a way around the oil supply crisis that has left both sellers and buyers scarred.


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The West Asia war has forced India to look at energy security through a new, different lens. The oil issue, for India, has now gone from being a procurement issue to being a test of economic resilience. That has compelled the govt to rethink how it sources, transports and stores the fuel that powers its economy.

Shipping disruptions in the Strait of Hormuz, one of the world's most critical trade channels, have badly exposed India's vulnerability to geopolitical shocks.

India imports nearly 90% of its crude oil requirements and is heavily dependent on foreign suppliers for liquefied petroleum gas (LPG) and liquefied natural gas (LNG). With usual supply routes disrupted, Indian refiners have had to look beyond the Gulf in order to keep domestic supplies flowing.

The war, which began on February 28, has also made shipping, insurance and freight costlier.

India's oil crisis playbook so far

So far, India has tried to find a solution to these problems through import diversification, local production and emergency procurement.

During the six-month period from March to August, India expanded its crude sourcing network to 31 countries. This move, however, has not necessarily cut its dependence on a small group of suppliers. While Russia's share in India's crude imports rose to 47%, nine of the 10 newly added suppliers together contributed just 1.4%.

The concentration of supplies, measured by the Herfindahl-Hirschman Index, increased 56% to 2,513 during the period, ET reported in September. This clearly showed how a rise in the number of suppliers failed to boost energy security for India as most of its oil import still continued to come from a tiny handful of countries.

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Russia's role in cushioning the blow for India has been significant. Russian crude supplies to India nearly doubled after the Iran war began, reaching 2.25 million barrels per day, Russian Deputy Foreign Minister Andrey Rudenko told ET in late September. Russian supplies went a long way in compensating for the supply shortfall that the Iran war caused for India.

Not just an availability issue

The problem is not just limited to physical availability of crude. India's oil import bill rose even as the volume of purchases fell.

It imported 59.7 million tonnes of crude oil in April-June, down 18% from 73 million tonnes in the corresponding period a year earlier. Yet the bill increased by 26% to $49 billion from $39 billion.

Higher crude prices and a weaker rupee have compounded the problem for India. The fallout is significant for an economy that imports close to 90% of its crude requirements: more money spent on energy leaves less room for other imports and puts pressure on the current account, currency and foreign exchange rate.

The higher energy bill has also made India's fight against inflation tougher, as costly crude raises the cost of transportation, manufacturing, power generation and many other downstream things.

Retail inflation climbed to 5.54% in September from 4.83% in August, moving closer to the RBI's upper tolerance limit of 6%. Wholesale inflation rose even faster, reaching 11.39% in September, driven partly by higher oil prices.

The government has issued a warning that geopolitical tensions and elevated crude prices could add to imported inflation, weaken the rupee and hit capital flows. The impact on consumers has been so far been partly manageable because state-run oil companies have been made absorb some of the increase rather than fully passing it on through petrol and diesel prices.

The LPG issue has been even more difficult for India. Before the war, around 90% of India's LPG imports came through the Strait of Hormuz. After the war began, Indian refineries were asked to raise LPG output to compensate for the shortfall. In September, refiners were targeting an additional 4,000 metric tonnes per day, taking production well beyond the existing 37,000-38,000 metric tonnes per day.

India has also begun to buy more from the US. It imported around 0.62 million tonnes of American LPG in August, in addition to 0.89 million tonnes in July. American supplies accounted for more than 73% of India's LPG imports in August, Kpler data shows.

These purchases have helped bridge the gap, although they also underline the criticality of having alternative arragements when it's no longer possible to do business as usual.

Measures India is putting in place

India is also looking at ways to make energy procurement and payments less vulnerable to market disruptions.

Under one such measure, the RBI decided to meet the entire daily dollar requirements of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum from October 12. The three companies could require approximately $200 million a day for crude and petroleum imports (based on August trade data estimates).

Meeting their dollar requirements through a dedicated arrangement takes a major source of recurring demand away from the foreign exchange market and could ease pressure on the rupee going forward.

It must, however, be noted that this RBI measure does nothing to increase availability of crude. Its main purpose is to make currency transactions smoother and reduce volatility in oil buying.

At the same time, India is also pushing ahead with a longer-term plan of building larger energy buffers.

Its partnership with Abu Dhabi National Oil Company (ADNOC) seeks to expand UAE-linked crude storage capacity from 5.8 million barrels to 30 million barrels. The arrangement includes the possibility of storing ADNOC crude in India as well as at Fujairah in the UAE, which could give India some extra flexibility during disruptions like these.

The two sides are also exploring cooperation in LNG and LPG storage and longer-term supply arrangements. This could help India secure cargoes in advance, keep emergency inventories and reduce dependence on immediate purchases during times of extreme volatility.

The challenge

The challenge, however, is no longer simply finding countries willing to sell oil. The availability of shipping, insurance, storage facilities and reliable payment channels has become equally important.

India's experience during the Iran war has shown that diversification is not just a bigger list of suppliers. Russia has helped a lot, US supplies have helped meet cooking gas requirements, and local refineries have raised production. But competition for Russian oil and chaos across West Asian shipping routes are proof that such arrangements cannot guarantee India uninterrupted supplies indefinitely.

Going by recent developments, the Russian cushion for India may not be unlimited. Reuters reported in September that Russian arrivals were expected to decline, with shipments projected at around 1.75 million barrels per day that month, as Moscow reduced exports and Chinese buyers competed aggressively for cargoes.

For India, the next phase of energy security will therefore depend on combining diversified imports with strategic reserves, local production and better, more resilient logistics.

The war has revealed the real cost of depending on a small set of routes. With this lesson in mind, India is now looking to set up a system that can withstand prolonged chaos. That is why industry-watchers will be looking keenly when the IOR foreign ministers meet in India later this month to see if they come up with an all-weather plan for the same, instead of merely responding to sudden supply shocks.