Fossil fuels to freedom: India’s roadmap to shedding its crude oil import addiction

Russian Crude, crude oil
Electric mobility, biofuels, and domestic exploration hold the key to a self-reliant future, unshackled from the volatility of crude prices.

The parliamentary standing committee on petroleum has expressed concern over the increasing reliance of oil marketing companies on spot tenders for crude oil purchases. It has cautioned oil public sector undertakings to plan their crude purchases better. The petroleum and natural gas ministry will soon conduct an audit to assess whether spot purchases have resulted in lower costs.

The committee had previously emphasised in a recent Bill tabled in Parliament that the average cost of purchases in spot tenders should be lower than term contracts. Spot purchases have been rising steadily over the past few years. In 2022-23, more than a third of all oil imports were through spot tenders, up from 27.58% in 2017-18. The petroleum ministry has acknowledged the need for an audit. Oil companies have always tried to increase the share of spot contracts, but global volatility, especially in major oil-producing regions, has also boosted spot purchases.

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The committee recognises the autonomy of Indian Oil Corporation and Bharat Petroleum in choosing their purchase methods. Indian Oil Corporation relies heavily on term contracts (two-thirds) compared with Bharat Petroleum’s more balanced approach (60:40 term and spot). 

Spot tenders allow companies to buy crude oil from the open market, instead of entering into long-term contracts with suppliers. This helps them avoid year-long contracts. The purchases are done with national oil companies at the official selling price of the country from which the oil is imported.

Spot tenders offer oil companies more flexibility in their purchasing decisions and are sometimes cheaper than annual contracts. On the other hand, annual term contracts, which are usually for one year, are finalised based on some major factors. While spot purchases offer flexibility, they expose India to volatile price fluctuations. Implementing efficient hedging strategies and diversifying import sources can minimise financial risks and stabilise forex reserves. Government initiatives to improve exploration and production contracts are promising. Further efforts, like streamlining bureaucratic processes and attracting advanced technology, can significantly ramp up domestic oil output.

These factors include techno-economic analysis, supply security, international political and trade relations, and geographical spread of supply sources. Oil PSUs resort to spot purchases to meet the balance requirement, which is not covered under the term contract. Spot purchases also provide flexibility to crude oil purchases based on seasonal market demand. Another reason why companies opt for spot tenders is the possibility of exploring new grades for which term contracts are not available.

India’s crude oil imports

India is not an oil-rich nation. It relies heavily on imported crude oil. India’s reliance on imported crude in the April-September period of the current financial year ending March increased to 87.8% from 86.5% in the same period last year. Experts say that if the trend seen so far in the ongoing fiscal continues, oil import dependency could hit a new high this year.

Despite the government’s push for self-reliance, this is one area where India has not been able to reduce dependence; on the contrary, the dependence on imports has been growing over the past few years. The booming Indian economy has led to higher energy consumption. In early 2015, the government had set a target to reduce reliance on oil imports to 67% by 2022 from 77% in 2013-14, but the dependence has only increased.

India had been courting Russia for crude oil since the beginning of the Russia-Ukraine conflict, as Moscow offered it at cheaper rates. However, in December, India’s Russian oil imports dropped to an 11-month low as the country could not take delivery of any cargo of the Sokol grade crude. Urals crude is the main source of India’s oil imports from Russia and it remained strong in the last month of 2023, according to the latest shipping data from commodity market analytics firm Kpler.

India’s growing oil import dependence comes at the cost of rising air pollution and greenhouse gas emissions. Accelerating the adoption of renewable energy sources like solar and wind, along with promoting electric mobility and hydrogen-powered vehicles, is crucial for environmental sustainability and climate change mitigation.

Before the war in Ukraine, Russia had a marginal role in India’s oil imports. When the West shunned Russian oil after Moscow’s February 2022 invasion of Ukraine, Russia offered deep discounts on its oil to willing buyers. This changed India’s suppliers, making Russia the top source of India’s oil, and pushing aside traditional suppliers like Iraq and Saudi Arabia. India is the world’s third largest consumer of crude oil.

Importing crude oil makes the economy vulnerable to global oil price volatility. It also affects the country’s foreign trade deficit, foreign exchange reserves, rupee’s exchange rate, and inflation.

While securing cheaper rates from Russia initially seemed advantageous, India’s growing dependence on a single supplier raises concerns about geopolitical vulnerability. Diversifying sources, particularly towards more stable regions, is crucial to ensure long-term energy security. India’s voice in the global oil market needs strengthening. Joining forums like the International Energy Agency can provide greater bargaining power and mitigate the influence of OPEC on oil prices.

Cutting oil imports is a key goal of the government. It promotes electric mobility, biofuels, and other alternative fuels for transportation and industries to curb crude imports. The government has also taken steps to increase Indian output and has boosted efforts to raise production by making exploration and production contracts more attractive. India has recently opened large areas for oil and gas exploration.Crude oil imports will not decrease significantly until there is more use of electric mobility and biofuels with conventional fuels in the country.