Indian refiners may need a rethink amid shrinking Russian crude discounts

This report has been updated to correct an error in the previous version

India’s appetite may be waning for crude oil from Russia, the country’s biggest source, with discounts shrinking by 77 per cent from a record high in early 2023, and by 61 per cent from the months after the invasion of Ukraine in February, suggests exclusive data accessed by Business Standard. But even record-low discounts at present are offering value to India’s state-run refiners, which are grappling with the inability to adjust pump prices for nearly two years. They lowered petrol and diesel rates by Rs 2 per litre last month, despite rising crude oil prices.

Discounts on Russian crude oil could currently be contributing $1.5 to $2.5 per barrel to gross refining margins (GRMs) of state oil refiners, but there are no official numbers available, said Swarnendu Bhushan, co-head of research at Mumbai-based brokerage Prabhudas Lilladher. The refiners are securing 20-30 per cent of their crude oil imports from Russia, he added. The contribution accounted for around 15 per cent of the average GRMs posted in the nine months to December 2023.

“The increase in GRMs in recent quarters (compared to the 2021-22 level) can mainly be attributed to lower cost of crude oil procurement from Russia,” said Sehul Bhatt, director, research, CRISIL Market Intelligence and Analytics. “Based on available data, the average realisation on Russian crude in 2022-23 and 2023-24 (April-January), respectively, was 14 per cent and 11 per cent lower than the average Indian import realisations (excluding Russia). It reduced India’s crude import realisations by more than $2 per barrel in the past two years.”

Gross margin realisations of $2 per barrel are not small by any measure for refiners. “While the margins and discounts would have come down from a high of 2022-23, they still continue to provide significant value to refiners’ GRMs, said R Ramachandran, an oil industry consultant and former director of refineries, BPCL. He explained that Indian refiners had learnt to process Urals profitably. Diesel yields from processing Urals are comparable to Arab Mix and Iraqi Basrah oil. Coupled with discounts and strong diesel cracks, Russian crude offers good value.

The contribution of Russian discounts to refining margins were higher in the past, Bhushan said. In the past six months, the discount on Russian oil, led by benchmark Urals, to the price of European benchmark, has averaged $3.5 per barrel. Dated Brent on a delivered basis was oscillating between $2.5 a barrel and $4 a barrel, said a Mumbai-based refiner. But the discounts were several folds higher between April 2022 and June 2023, peaking in the January-March quarter of 2023, Business Standard has learnt.

Beginning at an average $9 per barrel in the April-June quarter of 2022, discounts on Russian oil expanded to peak at around $15 per barrel in the January-March 2023 quarter, before shrinking to $5 a barrel in the July-September 2023 period following production cuts by Saudi Arabia and Russia reducing supplies of heavier crude grades, thereby increasing demand, said an industry official. 

Russian purchases are reflected in bulging GRMs of state refiners, which have been much healthier in the past few years. The average GRM of Indian oil-markiting companies stood at $10.2 a barrel in 2021-22, increasing to a record $19 a barrel in 2022-23 and $13 a barrel in the April-December period of 2023-24, CRISIL data shows.

Over the years, Indian state refiners have upgraded their refineries, converting fuel oil into value-added products, while discounts on Russian oil helped with record distillate cracks in 2022-23, said Prashant Vasisht, senior vice-president and co-group head, corporate ratings, at Mumbai-based ratings agency ICRA. GRMs have declined this year amid lower product cracks, and shrinking discounts, he added. Discounts on Russian crude oil averaged around $6 a barrel in 2023-24, compared with $10.5 a barrel in 2022-23, data from industry sources showed.

“GRMs depend on multiple factors – the price of crude oil and the technology and practices in place being the key ones – but discounted Russian oil can ensure better margins,’’ said Narendra Taneja, a Delhi-based energy expert. “Indian refiners would continue to buy Russian oil as long as the discount offered is attractive, and it is shipped on the delivery basis.’’

Discounts played a key role in Russia’s share of the Indian crude import market growing to over 35 per cent from less than 2 per cent in 2021. Alexei Gromov, director of Russian Institute of Energy and Finance, told a forum in Moscow this week that India imported 82 million tonnes of Russian oil in 2023, accounting for half of Russia’s seaborne exports, against 4 million tonnes in 2021, the Energy Intelligence reported. Gromov said India paid in dirhams for half its purchases, 49 per cent in dollars and the rest in yuan. Russian Urals – a medium, sour grade –is not viable without discounts because of impurities, logistical constraints and high transport costs, said an Indian refining official.

Russia initially offered discounts as Europe, its biggest crude oil buyer, slashed imports to support Ukraine, and imposed sanctions on Russian entities. This forced Moscow to offer steep discounts to sell to India and China. The record discounts in early 2023 coincided with the introduction of a $60-a-barrel price cap by the G7 nations on exports of Russian oil in case buyers wished to avail of western shipping and insurance services. A sudden tightening of sanctions amid copious supplies led Russian traders to expand discounts.

“With Russia’s export options limited, I expect crude oil to remain discounted, irrespective of a price cap,’’ said Vandana Hari, a Singapore-based energy expert and founder of Vanda Insights. “But the discount could continue swinging in a wide range, as seen over the past two years,” she said. But over the medium term, the Russian crude oil discount will become a relatively small factor in India’s refining margins, she added.



First Published: Apr 22 2024 | 6:30 AM IST

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