India starting to reach the limit of its Russian oil splurge

Moscow accounted for 46% of India’s oil imports last month.

By Rakesh Sharma and Alex Longley

From an island fort outside the heart of historic Mumbai, visitors can spot giant oil tankers unloading their cargoes to two refineries on the city’s southeastern coast. Up until a year ago, those ships would almost certainly have been hauling crude from one of a dozen mainstay suppliers — the Middle East, the US and West Africa. Today, the oil is more likely to be Russian.

Moscow accounted for 46 per cent of India’s oil imports last month, according to data from analytics firm Kpler, a staggering leap from less than 2 per cent before the invasion of Ukraine. In absolute terms, May marked a high. Granted, China, too, has taken far more Russian crude over the past year, with imports hitting records, but it is India, a strategic US partner, that has stepped in from the wings to prop up the Russian economy.

The question today is whether that purchasing spree can keep going, as discounts narrow for India but financial pressure on the Kremlin increases, with funds needed more urgently than ever to quash domestic threats to President Vladimir Putin’s rule.

Read | India, China bought 80% of Russia's oil in May 2023: IEA

The shift to date has suited the Kremlin, looking for new markets as Western buyers and established oil traders pull back. It’s worked for India too, eager to snap up cheaper fuel to keep inflation in check. In April, the average cost of Russian crude delivered to Indian shores was $68.21 a barrel — while Saudi oil stood at $86.96.

“Indian refiners took the far, far high end and beyond of what we thought would be possible,” said Jamal Qureshi, Managing Director for Strategy and Analysis at Petro-Logistics. “They quickly replaced Urals lookalike grades, which we expected, but they’ve also backed out other grades beyond that.”

The refineries visible to day-trippers on Elephanta Island, at least, suggest that surge is set to cool.

First, there’s infrastructure. While analytics used to decide refineries’ optimal feedstock has largely pointed at Russia’s Urals blend, neither of these two plants were ever designed to take Russian barrels. The Bharat Petroleum Corp. Ltd, or BPCL, site was built to process domestic Indian crude that’s less sulfurous than Russian oil.

More Russian barrels would mean producing more fuel oil, a sludgy oil that’s often sold at discount prices. Or costly re-purposing — which executives interviewed by Bloomberg said they were not keen to undertake.

“Refiners at this stage are not seeking any changes in configuration,” said Rajiv Agarwal, Technical Director at Engineers India Ltd., a state-owned company that advises on such projects.

The BPCL refinery in Mumbai, for example, doesn’t have a coker — a unit that allows the processing of heavier, sulfurous crude like Russia’s — so about a tenth of the crude processed is Russian, according to one executive who asked not to be named because he is not authorized to speak to the media. That’s lower than at some of its newer plants, where that figure is as high as 40 per cent.

Refinery configurations, he said, were the biggest limiting factor — along with the fear of depending too heavily on a source of supply that could face interruption if sanctions tighten. That would keep any potential increase to 2 per cent or 3 per cent.

“Urals was never a preferred crude in past,” said R. Ramachandran, former Director of Refineries at BPCL. “If pricing is right, and refineries are required to process Urals as majority crude, then capital investment is required in plants which may take three to four years.”

Nobody responded to emails sent to BPCL’s media department seeking comment.

Unlike some of Russia’s other customers, India also suffers from a relative lack of commercial tanks needed for blending, as compared to countries such as China.

India doesn’t have to pull away from Russia. By blending different types of oil in storage tanks, some Russian crude supplies could be made more palatable to plants that are struggling to take more. This could allow an increase that some of the executives estimate could be between 200,000 and 400,000 barrels a day.

There’s also the question of other suppliers. Several refinery officials said they feared a long-term shift — as opposed to opportunistic buying — would damage relations with existing partners, specifically producers in the Middle East.

To date, buyers have focused on spot Russian purchases, an arrangement that works when supplies are plentiful. More recently, Indian refiners have also been in talks to secure more stable flows from Russia — but discussions have been slow.

But a further surge would require renewed government enthusiasm to guide refiners.

“Going forward the question is whether state-owned refiners can be induced to take more Russian barrels than they have to date. That’s where there’s most of the potential space, on the public side,” Petro-Logistics’ Qureshi added.

Behind it all, of course, there’s the politics of any further purchases.

While Russia has less economic leverage than it once did, the two countries have a close relationship dating back decades, deeply rooted in security. Moscow is India’s largest supplier of weapons.

Indian Prime Minister Narendra Modi, meanwhile, was feted in Washington last week, where the White House concern is simply that what India does buy is cheap, minimizing revenues to the Kremlin while keeping tankers moving.