How Much Do Russian Crude Discounts Benefit The Indian Oil Marketing Segment?

Since the Russia-Ukraine conflict began in 2022, India has become a significant purchaser of Russian crude oil. Despite sanctions imposed by other nations on Russia, India strategically procured Russian crude at substantial discounts.

This move proved advantageous for Indian oil marketing companies, as evidenced by their supernormal gross margin during the 2022-2023 period. However, data shows that the Russian crude discount benefits have narrowed, despite its rising share in the total import bill.

Russia's share to India's total imports has risen significantly. According to calculations, based on the Ministry of Commerce data, its share in the 10 months in FY24 averaged at 35%, as compared with 1-2% prior to the conflict.

From April 2023 to January 2024, India's overall import bill decreased by 15.5%, as compared with the previous year. However, the total oil import bill from Russia surged by 65% year-on-year to $23,657.15 million. In contrast, the import bills from India's other primary crude suppliers such as Iraq and Saudi Arabia declined by 17% and 27%, respectively.

Despite the significant rise in Russia's import bill share, the overall benefit has reduced in FY24 by $2 per barrel, according to a Kotak note issued on April 4.

Kotak highlights that in FY23, India's average Russian crude import price was $83.6 per barrel, while the Dubai crude benchmark—which sets the base price for most Indian crude imports—stood at $95.8 per barrel. This indicates that India enjoyed an average discount of $12.2 per barrel.

In the nine months of FY24, however, India's average Russian crude import price stood at $75.9 per barrel, while the Dubai crude benchmark averaged at $82.7, indicating a $6.8 per barrel discount.

If you look at the premium or discount at which India imported crude from its top suppliers, while it does enjoy the most discount from Russian crude, the benefit has declined by $5.5 per barrel in nine months of FY24, as compared with FY23.

Indian oil marketing companies don't disclose the portion of Russian crude in their mix, but Kotak uses port-specific Russian import data. The data indicates that more than two-third of Russian oil imports arrived at Gujarat ports.

Kotak mentioned low Russian crude usage at Hindustan Petroleum Corp.'s Mumbai refineries at 8-10%, and 12-15% for Bharat Petroleum Corp. However, it states that Hindustan Petroleum's Vizag and Bharat Petroleum's Kochi refineries' Russian crude share will be higher at 31-32%.

Additionally, Kotak highlights that Paradip Port import data suggests that Russian crude usage will average around 24-25% for Indian Oil Corp.'s three eastern India refineries.

As compared with the government-owned oil marketing companies, independent refiners like Nayara Energy Ltd,, Mangalore Refinery and Petrochemicals Ltd. and Reliance Industries Ltd. would likely benefit more from Russian crude, according to Kotak.

Hindustan Petroleum's raw material costs have risen to $12 per barrel, as against an average premium of $5 in the FY17-22 period. While costs in the nine months of FY24 have declined, its costs include only a modest Russian crude usage, said Kotak.

According to Kotak, Bharat Petroleum seems to have benefited the most from Russian crude usage, with raw material costs not increasing much as compared with the past periods.

For Indian Oil, Russian crude benefits are lower as compared with Bharat Petroleum, but higher than Hindustan Petroleum.

Before FY16, crude costs accounted for 97-99% of raw material costs for Bharat Petroleum and Indian Oil, and nearly 100% for Hindustan Petroleum. However, these companies have stopped reporting this breakdown recently.

Kotak noted that compared to the Dubai benchmark, OMCs reported that raw material costs have not significantly decreased in FY23 and nine months of FY24. In fact, crude costs for OMCs in FY23 were higher than the average in the financial years between 2017 and 2021. Despite a decline in costs in the nine months of FY24 due to increased usage and narrowing Russian crude discounts, the benefits were limited.

While ethanol purchases have contributed to some cost expansions, Kotak estimated that ethanol costs have increased Hindustan Petroleum's raw material costs by only $7 per barrel over the past three years, while for Bharat Petroleum, it's been $3.3-4.3 per barrel. Kotak forecast a $2.2-3 per barrel impact for Indian Oil.