05-10-2017

Why India’s import of US shale oil is a big deal

As the Very Large Crude Carrier (VLCC) docked at Paradip Port in Odisha on Monday to unload its 1.6 million barrels of shale oil, history was created. This was the first time since the US allowed exports of its oil after a ban of 40 years that it has supplied to India. But the move is significant in many other ways than just the symbolism attached to it.

India and other Asian countries were dependent to a large extent on oil production in west Asia by the Organisation of Petroleum Exporting Countries (OPEC). Because of the proximity to Asian economies, these OPEC countries charged a premium for the oil they supplied.

Taking into account that the cost of transportation from any other major oil producing countries would be prohibitive, OPEC countries got away with this. India has been raising the issue of the premium with OPEC countries over the last three years. Being the third-largest oil consumer, India demanded at a meeting of OPEC members and non-members that the premium be removed. The minister of petroleum and natural gas, Dharmendra Pradhan, said at the meeting that the global oil industry stood at a delicate crossroads and that any attempt to frustrate or assign lower importance to Indian demand would be detrimental to the suppliers.

While the OPEC nations were still deliberating on the action to be taken, India moved ahead by ordering its first consignment of 2 million barrels of shale oil for around USD 100 million. This move again was not just symbolic in order to put pressure on the OPEC countries, but it made economic sense, too.

As the cartel of OPEC nations was trying to keep oil prices higher by deliberately cutting production, US oil fields were firing on all cylinders. As a result of higher supply, the spread between Dubai Oil and those from Brent and WTI (West Texas Intermediate) fields fell in favour of the western oil fields. This made importing oil from the US cheaper than those from west Asia.

The government played an important role in bringing transportation costs down as it eased restrictions on importing oil compulsorily through ships owned by Indian companies. Using a VLCC to transport oil reduced the cost of transportation and made the decision economically viable.

The refiner, in this case, Indian Oil Corporation (IOC), benefited not only from the lower price of crude but also from a better quality of the oil. Shale oil, also known as tight oil, gives the best yield for the most lucrative middle distillates. In other words, the gross refining margins (GRM) of refineries will improve if the shale oil is used. Little wonder then that Reliance Industries too has booked 1 million barrels of WTI and Eagle Ford crude each.

Finally, the geopolitical benefit that India gains by purchasing US crude also needs to be taken into account. The deal to buy US oil was struck in a meeting between Prime Minister Narendra Modi and US President Donald Trump. For India, importing crude oil also helps in bringing down the USD 24-billion trade deficit which Trump has been pointing to in his attack on India’s impact on US jobs.

In the context of around 1,500 million barrels of oil imported by India, the present import is too small to move the needle, but it is surely going to turn heads in the OPEC world as the cartel struggles to find new markets and environmental awareness puts pressure on oil demand.

Source: Moneycontrol Research

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