Refinery economics is highly dependent on crude oil sourcing. The cost involved in the crude oil sourcing forms the single largest cost component in the refiner's economics. Costs and payback periods for refinery processing units must be weighed against anticipated crude oil costs and the projected differential between light and heavy crude oil prices. Using more expensive crude oil (lighter, sweeter) requires less refinery upgrading. Using cheaper heavier crude oil means more investment in upgrading processes. Thus, crude oil sourcing plays a very critical role in the refinery economics. In order to optimize their cost, Indian refiners are now trying to diversify their crude oil sources and trying to procure cheap and opportunity crude. Also other factors like decreasing availability of sweet crude, US sanction on Iran, up-gradation of existing facilities; are the reasons behind India re-thinking its crude oil sourcing strategies.
Around 80 percent of the India's crude oil needs are met by imports. Recently, India has overtaken Japan as the world's third-biggest crude oil importer in 2013. India imported 3.86 million bpd of crude oil last year with Middle-east being the largest exporter of crude oil to India. In 2012, over 64 percent of crude imports came from Middle East. In 2010, US sanction on Iran, gave a jolt to India, forcing it to find replacement for Iran crude. Iran was once the second-largest supplier of crude to India after Saudi Arabia. So far, much of the switching by state refiners has been to other Middle East sources, such as Saudi Arabia and Iraq, which are now the top two suppliers as Iran has slipped to number six.
Many Indian refineries are now being equipped with upgraded plants to handle the heavier grades of crude oil currently being produced. With a Complexity Index of 11.3 (as defined by the Nelson Complexity Index) RIL's refinery at Jamnagar is able to process heavy and sour crude oils to produce high value products. BPCL`s INR. 14,225 crore expansion project - Integrated Refinery Expansion Project (OTC:IREP) at Kochi, is expected to be completed by May 2016. The refinery will be able to process cheaper high sulphur crude oils once the project is implemented. IOCL's 15 MMTPA refinery project at Paradip, Orissa, presently under construction is expected to commission by 2014. It will also be a state of art refinery that will be able to process high sulphur, heavy and high TAN crude oil to tap the opportunities presented by cheaper crude varieties. With upgraded plants, Indian refiners are trying to explore heavy crude options which are cheap to procure. As can be seen from the graph, the percentage of imports from South and Central America and Africa is increasing over the years. These crudes are mostly of heavy grades. These crudes will provide an opportunity to Indian refiners to earn a return on the billions of dollars spent in their plants upgrations, thus improving their margins.
Graph: Relative Distribution of Region-Wise Crude Oil Import in India
Indian refiners are moving towards Latin American oil, drawing the benefit of cheap crude that have lost its market in the United States to shale oil. In 2005-06, Latin American oil accounted for a scant 2.3 percent, or 46,200 bpd, of India's crude imports but by 2012-13 that had jumped to about a fifth, or 672,400 bpd. The half of Latin America crude (300,000 bpd) was under a long-term deal between Venezuela and RIL's Jamnagar refinery. MRPL has become the first Indian refiner to buy Argentina's medium-sweet Escalante grade. MRPL is targeting as much as 40,000 bpd (about 15 percent of its overall needs) from Latin America in the FY 2014-15. IOCL, leading refiner in India, is planning to buy 10,000 bpd from Colombia in 2014-15 and wants to buy oil from Venezuela. It has been buying Mexican oil since 2012 and aims to get a trial cargo of Brazilian crude in the coming months.
In the coming years, there might be huge changes in the India's crude oil sourcing strategies due to changing market dynamics. To reduce its dependence on any particular region of the world, India has been consciously trying to diversify its sources of crude oil imports. In this diversification strategy, there might be a visible shift from light to heavy crude, as India's state-run refiners join private players Reliance and Essar Oil in the race to improve their refining margins. Also, in more recent years, the supply of light sweet crude has declined and newer sources of crude oil tend to be heavier. More complex facilities are coming up in the country that will further this trend.