Forex of $3 billion at stake: India to push for cut in crude premium rates

NEW DELHI: India is looking for ways in which it can get West Asian oil and gas producers to cut the so-called Asian premium, which adds up to more than $3 billion annually, through collective bargaining.

The premium is the amount Asian buyers pay on top of the crude or gas price for reasons of proximity and stability of supply. With global prices declining and India finding cheaper alternatives elsewhere, this is probably the best time for the country to try and bring the premium down.

Currently, refiners individually negotiate long-term contracts with producers, limiting their bargaining power, government and industry officials said. "Initially, state-run refiners could take the lead in collective negotiation,” one person said. India imported crude worth about $143 billion in 2013-14, three-fourths of which came from the Gulf countries, with a built-in premium of about $1.5-3 per barrel, the officials said.

"The premium is charged on the pretext of long-term uninterrupted supply of crude," said a person familiar with the development. "Since international oil prices are on a slide, there is an opportunity to renegotiate the contracts in our favour. An oil industry veteran said Indian buyers could influence producers more effectively if they acted in concert.

The Gulf countries, especially Saudi Arabia, sell crude oil and liquefied natural gas (LNG) at lower rates to European and American buyers compared with Asian importers such as Japan and India. The premium is embedded in the official selling price (OSP), a former oil minister said, requesting anonymity.
China has been busy developing and acquiring energy sources all across the globe and with the US no longer as dependent on the region for oil, conditions are amenable for Indian buyers.

"Gulf countries are losing their bargaining power, especially after the shale gas revolution in America. Even China is able to bargain better rates from them because of its diversified sourcing and overseas acquisitions of oil and gas assets," said the former chairman of an oil company.

"If China can bring down the cost, then why not India?" To be sure, India has tried and failed to do this before, particularly with regard to Saudi Arabia, its single biggest energy supplier. In 2010, former oil minister Murli Deora asked Saudi Arabia's King Abdullah for a relaxation in the premium during the visit of then Prime Minister Manmohan Singh to Riyadh.

Three years later, his successor Veerappa Moily had denounced discriminatory pricing at the 8th Asia Gas Partnership Summit. Earlier that year, Moily joined hands with Japan to oppose the Asian premium charged by Gulf-based LNG producers.

Prime Minister Narandra Modi's recent visit to Japan could revive the synergy between the two large Asian energy importers and strengthen their collective bargaining power, government officials said.

Meanwhile, after Gulf-based energy exporters turned a deaf year to entreaties, Indian refiners started cutting imports from the region, officials said. Having found cheaper alternatives in Africa and South America, Indian refiners have reduced their dependence on the Gulf for crude oil to about 61 per cent in 2013-14 from about 72 per cent in 2008-09 and this percentage would shrink further.

"The gap is widening in absolute numbers since 2011-12, when we imported about 119 million tonnes (MT) of crude oil from the Middle East," said an executive at a state-run oil company. "Despite increased demand, this quantity is expected to be less than 115 MT this year."

India's total crude oil imports amounted to 171.73 MT in 2011-12, which rose to 189.24 MT in 2013-14. This figure may go up significantly after the commissioning of Indian Oil Corp's 15 MT capacity Paradeep refinery and the upgrade of refineries belonging to Bharat Petroleum Corp. and Mangalore Refinery and Petrochemicals Ltd, executives said.

The government is also working on a two-pronged strategy to have better bargaining power while sourcing crude, said officials. One is to shift the focus from the Gulf to Africa and South America and the other is to replace liquid fuels by alternates such as natural gas, solar power and other renewable energy sources, sources said.

"Private refineries are leaders in reducing dependence on the Gulf crude to reduce their input cost and avoid uncertainty due to frequent politically unrests in countries such as Syria, Iraq and Iran. New and upgraded refineries of public sector companies will also follow suit," one government source said.