India's Russian oil imports - the reality
While writing about and discussing the Ukraine war in my blog series, a comment I hear most
often about India’s position, is that India is: Cosying up to Putin by buying
Russian oil, or India is
deliberately violating sanctions by buying oil – and financing Russia’s
military. Those who do not attribute any malafide intention on India’s part
claim India is doing so to avail of big discounts on Russian oil. This is not
just incorrect, but hides the more cynical economic interests of the countries
sanctioning Russia.
Before
analyzing Indian oil purchases from Russia, I few basic points for readers:
Oil is
exported in crude or refined form. Since refineries are often located close to
where the end product is consumed, oil exporters usually have lower refining
capacity than their crude producing capacity.
Oil price
movements have been the subject of innumerable studies. In general:
Oil demand generally increases less than GDP growth. It is reducing in advanced
economies where there is both low GDP growth and a move away from fossil fuels.
While
demand growth is predictable, price can change sharply with small changes in
supply.
Refining
capacity increase is coming from countries like China and India. Western
capacity is stagnant or falling.
In oil markets, tons and barrels are used interchangeably. 7.62 barrels of oil
equals 1 ton.
There are many grades of Oil. Brent crude is the most widely used benchmark. It
traditionally sells at a premium to Russia’s most common grade – Ural.
Understanding the oil market: Among recent years, 2017 was a good year to understand the oil market.
There were no sanctions on oil producers. Global GDP growth was average. There
were no big disruptions like covid. In that year Iran and Venezuela (both were
sanctioned after 2017) produced about 1.8 million barrels a day more than they
currently do. The average price of Brent crude in 2017 was $ 54.25 / barrel.
Once 1.8
million barrels /day of Iranian and Venezuelan oil were taken off the market,
Brent oil prices in 2018 were $ 71.3/
barrel, before stabilizing to $ 64.3 in 2019, when additional capacity
came into the market – most of which was 1 million barrels/ day exported from
the US when marginal wells became profitable. As a result of sanctions, while
the sanctioned countries (Iran and Venezuela) lost US$ 39 billion a year, OPEC’s customers
had to pay an extra US$ 100
billion a year based on a $ 10 increase in 28 million barrels a day exported by
OPEC. Before Iranian oil was sanctioned, Iran accounted for 16% of India’s
crude imports.
Thus, if
an oil producer has to reduce output for any reason, it is not in OPEC’s
interest to increase output.
Russia’s
oil industry: In
2021, (pre-war) Russia produced 540 million tons of crude.
260 mil tons were exported as crude.
280 million tons were refined, of which 140 million tons of refined oil were
exported.
Russian
refining capacity is now 325 million tons. Capacity has increased by 56
million tons in the
last 15 years. In the same time, the EU cut refining capacity by 71 million
tons, closing 26 of their
100 refineries.
In 2019,
Russia earned US$ 230 billion from energy exports (crude oil, refined oil and
natural gas)
and US$ 235 billion in 2021 (2020 being
a covid year, was an aberration).
In 2022, it was $ 271 billion (it rose after sanctions), while it reduced to
227 billion in 2023, it is projected to be 240 billion in 2024. Thus, the
Russian energy sector has been unaffected by sanctions
and is earning its pre war revenues.
Oil export split. Pre war and current.
|
|
2021 |
2024 |
|
Crude oil total production
(Million Tns) |
540 |
521 |
|
Crude oil total export (Million
Tons) |
260 |
240 |
|
Of which EU: |
115 |
12 |
|
Other Europe: |
24 |
12 |
|
China |
77 |
103 |
|
India |
4 |
83.2 |
|
Avg Russia crude oil export
price |
$ 62.5 |
US$ 70 |
|
Refined oil exports (US $
Billion) |
71 |
71 |
|
Turkey + China + Saudi (US$ billion) |
7 |
27 |
|
EU (US$ Billion) |
23 |
2 |
Russia’s average export price has been above the NATO imposed price cap of $
60/ barrel.
This has been the case since the start of the Ukraine war.
There is
a similar situation for Russian gas exports.
|
|
2021 |
2024 |
|
Total gas production (Bln Cu m) |
762 |
670 |
|
Gas export (Bln Cu m) |
240 |
147 |
|
EU export share |
150 |
40 |
|
China export share |
10 |
40 |
Though sanctions
have caused a drop in gas exports, it takes more time to reorient gas supplies,
because the majority of supply is by pipeline, rather than by sea. Pipelines
take years to build, particularly in the harsh Siberian terrain. Russian LNG exports
(sea) have remained unchanged, while pipeline gas to China is projected to reach 100 Bcm once new
pipelines are complete.
India: Oil trade. Pre-war and current
|
|
2021 |
2024 |
|
Total oil imports ( million Tons) |
212 |
232 |
|
Total Oil imports (US$ billion) |
119.2 |
132.4 |
|
Share of Russia (US$ billion) |
2 |
46.5 |
|
Refined Oil exports (US$
billion) |
49.5 |
47.7 |
|
Share of EU (US$ billion) |
6.9 |
24 |
|
Oil products exported (mil tons) |
|
62.6 |
The US: Since the
start of the Ukraine war, US crude production has increased and is at a record
high. The incremental US crude volume since 2022 has mostly been exported. The
US has become the 3rd largest exporter after Saudi and Russia. US
exports of crude to the EU in 2024, are projected to be 72 million tons in 2024. Further exports are
constrained by increased shipping costs pushing up prices to Europe and the
need to extract more oil from marginal fields (or invest in new ones) pushing
up crude prices. The US has also become the largest gas exporter and the largest supplier to Europe, displacing
Russia. The value of incremental (current - pre war) energy exports from the US to Europe are more than the aid given to Ukraine.
Norway: Since 2022, Norway’s oil exports to the EU
increased and it supplies an incremental 200,000 barrels/day or 9.5 million tons/ year.
The
shortfall in Russia oil to Europe is 124 million tons i.e 103 million tns of
crude and 21 million tons of refined oil. This is being made up by: the US - 72
million tone/year. Norway 9.5 million and India
(approx. 33
million tons of
refined oil).
EU rules
governing sanctions state that if Russian crude oil is mixed with crude from
other sources and refined, it no longer is `Russian’ oil and hence can be
exported.
The other countries of OPEC have actually reduced volume after 2022. Any increase by OPEC without a reduction in
Russian exports and after an increase in exports from the US and Norway would
have led to a glut and a reduced price realization for OPEC despite higher
volumes. OPEC volume cuts are expected to last till the end of 2025. The biggest
drops in OPEC volumes are
from Saudi Arabia and Iraq, which were India’s leading suppliers until
2022.
https://publications.opec.org/asb/chapter/show/123/2126/2127
India’s oil
trade:
Russian oil has been supplied to India (and China) at a discount of only
between 5-10% after adjusting for grade and freight. The discounts were higher
in 2022, but have reduced as the oil price cap if $ 60/barrel imposed by NATO
was seen to be ineffective. The savings to India, quoted in the
mainstream media (figures vary widely) do not consider the different (cheaper)
grade of Russian oil, or extra freight cost, or that a lot of the saving is
passed on when exporting refined oil to Europe. Theoretical cost saving figures
take as a comparison, a higher spot price of alternate suppliers, had we, in
theory, bought from them. India’s average oil import price of $ 73/barrel in
Dec 24 is the same
as the 3 month average before the war (Dec 21-Feb 22).
Of the estimated 83 million tons purchased from Russia in 2024, over 30 million
is refined and sold to Europe, which benefits from the discount on Russian
crude and the lower refining cost from
Reliance in India (which handles 80% of India’s oil exports and has a long term
supply contract with
Rosneft, Russia). Hence, discounts on Russian oil are partly passed on to
Europe.
This is not a windfall gain for Indian’s exports as export volumes have
remained unchanged since 2021 (see table). The share of Europe in our oil
exports has increased from US$ 6.9 billion to 24 billion. However India’s
exports to Singapore, Brazil, Indonesia and South Africa have dropped, as
these countries are buying Russian refined oil at lower prices.
The
real sanctions busting:
buying refined oil from Russia is a more blatant form of sanctions busting, as
there is no value addition of imported Russian oil – unlike India which refines
Russian crude. The export price is also far above the price cap of $ 60 /
barrel.
Turkiye, Saudi and China have bought Russian refined oil at low prices in spot
deals as it is cheaper than refining oil in their own refineries. Of the
countries importing Russian refined oil, Turkiye is a NATO member and Saudi a
US ally.
While
there is a lot of talk of Russia’s `ghost fleet’ – ships that belong to flags
of convenience and
therefore cannot be intercepted when they carry oil above the price cap of $
60, the EUs data shows a lot of these shipments being carried by ships
registered in EU countries, or China/ UAE.
The problem for the
EU: The EU’s
average import price for crude oil has remained the same between 2021 (avg.) and
Dec 2024. While crude prices have been unchanged the replacement of 21 million
tons of refined oil from Russia with 31 million tons of Indian refined oil,
reduces the capacity utilization of EU oil refineries, which are already under
margin pressure. Margins of European oil and gas companies have fallen in
favor or US companies. (While India’s Reliance has sold more to the EU it has
sold correspondingly less oil products to other export markets.
Gas prices for the EU have risen approx. 40% since Feb 2022. China's gap prices have fallen, which
will have implications for the competitiveness of Chinese industry vs Europe.
Ways to reduce
Russian oil revenues:
If sanctions have to be implemented (I am personally not in favor of – having
seen from personal
experience in consumer products, how they are cynically bypassed), the
following can be done without affecting countries that cannot afford increases
in energy prices.
If Iran and Venezuela are not sanctioned, they can supply an additional 1
million barrels/ day of crude or 47.2 million tons per year. Before sanctions,
these two countries supplied over 1.5 million barrels a day more than their
current volumes.
All that sanctions on Venezuela have achieved is to send a large number of
illegal migrants to the US. For Iran, I believe the Iranian government and the
US with the EU will be more amenable to reviving the Iran nuclear deal in return
for sanctions relief. The Iranian economy is in bad shape. In my blog series on
Israel’s wars, I argue that Iran’s proxy forces – the Houthis and Hezbollah are,
for all practical purposes, defeated. There is a real fear than fresh US
sanctions under a Trump administration can cause a collapse in their economy.
At the same time there is a fear of a sanctioned Iran going nuclear and more
firmly into Russia’s orbit.
The reason energy sanctions on Russia are not well received in the global south, is that it is ludicrous that the West sanctions half the world's oil and wants to keep the other half for itself.
If
Iranian and Venezuelan oil comes into the market, it would reduce Russian crude
exports by
30 million tons (if for e.g. India were to buy Iranian oil at pre sanctioned
levels and at the same price as Russian supply). It would also cause a drop in
the price of crude by at least $1 per barrel.
A second option is to sanction only Russian refined oil, for which sufficient
alternate capacity exists across the world. The margins on refining are as much
as the margin on crude sales for Russia. One ton of refined oil therefore news
Russia twice the profit of a ton of crude. Stopping supplies of discounted
refined oil, will prevent countries that reexport it without value addition,
from profiteering, or lowering their energy costs.
Both measures together
will cause a loss in revenue to Russia, greater than its current defence budget,
without harming the interests of oil importing countries – it will in fact
reduce prices to
importers.
The Indian oil market to 2030
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