Indian private refiners may gain from EU's ban on Russian oil products

India is consolidating its position this year as Russia’s most important market for crude oil two months after the European Union’s ban on exports of Russian crude oil began. The gains derived from trade with Russia are likely to enlarge after the latest sanction salvo by the 27-nation bloc came into effect on 5 February -- where the EU banned imports of Russian fuels, led by diesel.

At the same time, the EU and other allies will institute a global price cap on Russian refined oil products. That will bar access to ships, marine insurers and services unless the refined oil products are purchased for a price at or below an agreed limit. The price cap has been set at $100 per barrel on premium oil products such as diesel and $45 per barrel on products like fuel oil.

The latest product ban by the EU may result in higher supplies of Russian crude to India and China, and enable Indian private refiners Reliance Industries and Nayara Energy to divert supplies of diesel and petrol to Europe, and establish their presence in the market, analysts said. “India will benefit, as Europe will have to source its refined product import needs from Asia, West Asia and the US, and Russia will place its refined products elsewhere,” said Tilak Doshi, a London-based oil expert, with decades of experience at Unocal, Saudi Aramco and KAPSARC among others. “There are some delays at some new West Asian refinery projects, so Asia and US product exports to Europe will be that much larger, to the greater benefit of Indian refiners.’’ 

Indian refiners can process cheap Russian crude into products, and export to Europe. India has become the biggest importer of seaborne Russian crude oil in the world, taking between 1.2-1.3 million barrels a day over the past two months, compared to 1.1 million barrels a day by China, said David Wech, chief economist, Vortexa, the London-based commodity market intelligence provider, 

Exports of diesel by India fell 10 per cent in January from December to around 514,000 barrels a day (b/d) while overseas sales of petrol dropped by 17 per cent to 293,000 b/d, according to Vortexa, which uses ship-tracking data to estimate supplies. But sales may increase this month after the EU ban came into effect, Doshi said.

Reliance Industries, which accounts for 27 per cent of India’s refinery capacity, is the biggest exporter of transport fuels from India. It’s not that we cannot export but our priority is the domestic market, said the refining head of a state-run refiner. The overall share of the OMCs in petroleum products exports does not exceed 8-10 per cent, with the private refiners accounting for the rest, according to CRISIL Research data.

India’s overall exports for petroleum products in fiscal 2021-22 increased 10 per cent to 62.8 million tons from a year earlier. In value terms, the increase was steeper at 111 per cent on the year to $44.4 billion, according to oil ministry data.  

“The EU ban on Russian product sales might provide a window of opportunity for the private refiners to increase exports of products, at least in the short-term until the realignment of supply chain,” said Hetal Gandhi, director, research, Crisil Market Intelligence & Analytics.  

But current export duties of Rs 7.5 per litre on diesel and Rs 6 per litre on jet fuel is expected to impact the overall profitability of the private refiners from the export of products, Gandhi said. The decision to export products will depend on specific parameters such as overall cost of crude oil import, existing contracts for sale of products and supply-chain limitations. Taxes on exports of refined diesel increased this fortnight to $14.6 a barrel on diesel and to $11.7 a barrel on jet fuel from $9.8 a barrel and $6.8 a barrel, respectively, from the previous fortnight, according to a report by Nomura Securities.

What could constrain Indian refiners is the lack of adequate crude processing capacity, said Vandana Hari, an oil expert and founder of Singapore-based Vanda Insights. With domestic demand on the rise Indian refiners will have to supply the local market first before looking to increase exports, she said. Domrestic demand for diesel and petrol increased by 12 per cent and 14 per cent respectively in Janjuary from a year earlier, according to oil ministry data.

India’s refining capacity has stayed stagnant at around 5 million barrels a day for lack of investments by Indian refiners as New Delhi started prioritizing EVs and biofuels. Moreover, the government was hoping that the first phase of a 1.2 million barrels a day green-field refinery project, with the participation of state oil companies of Saudi Arabia and UAE, proposed in 2016, would be ready by now. But the Ratnagiri refinery plant in Maharashtra is as good as shelved.

In April-December, Indian refiners processed 5.03 million barrels a day of crude, more than the installed capacity. Refiners in Singapore and elsewhere operate at around 80 per cent, giving them leeway to boost runs. But since Indian refiners already operate above capacity, Hari said, they have little juice left in their machinery to supply more diesel to Europe.

EU's decision to ban import of petroleum products is expected to significantly impact Russian refiners in the short-term because product exports to Europe accounted for 54 per cent of total Russian product exports in 2021, said CRISIL Research. Europe imported around 700,000 barrels a day of diesel from Russia, a little less than half of what India consumes. Overall, the EU used to import over one million barrels a day of Russian fuels and 2.5 million barrels a day of Russian crude.

That may force Russia to ship more crude to Asia if it fails to find markets elsewhere. What began as a temporary measure for Indian refiners last year, who, enticed by deep discounts, began buying Russian crude, is turning more permanent and profitable. The price cap on Russian oil by the US-led G7 nations and stringent penalties for violations, which some thought would cripple Russian supplies, has only increased flows of Russian oil to Asia.

India imported 1.13 million barrels a day of Russian crude in November, a month prior to G-7s Russian crude oil ban, according to Indian customs data. Imports rose to a record 1.42 million barrels a day in January, according to commodity market intelligence provider kPler.

Russia is offering good prices, so Indian refiners are happy purchasing crude from Russia, oil minister Hardeep Puri said at India Energy Week in Bengaluru.