State-run OMCs fail to take advantage of easier norms to buy crude oil

Lack of trained personnel and cumbersome internal processes mean oil marketing firms benefit little from norms to buy crude oil in the spot market, say experts

Photo: Reuters
Photo: Reuters

State-owned oil marketing companies (OMCs) have benefitted little from easier norms to buy crude oil in the spot market due to lack of trained personnel and cumbersome internal processes, industry officials and analysts said.

In April, the government empowered boards of Indian Oil Corp. Ltd (IOCL), Hindustan Petroleum Corp. Ltd (HPCL), Bharat Petroleum Corp. Ltd (BPCL) and Mangalore Refineries and Petrochemicals Ltd (MRPL) to make quick spot purchases on their own to take advantage of temporary discounts in the market, instead of issuing tenders as before.

The new norms help IOC, BPCL and HPCL save 10-30 cents each per barrel of crude oil, officials at these companies said. However, these figures are much lower than $2-4 per barrel that crude oil customers save worldwide through similar purchases.

A BPCL official said spot crude purchases are faster now, and this is helping BPCL make more spot buys. “But we need trained personnel, in the absence of which, the full benefit eludes us. We are training officials in oil trading,” the official said, speaking on condition of anonymity. Spot purchases currently form 15-30% of the overall crude procurement of OMCs.

BPCL did not reply to an email sent on 27 September.

The government move was aimed at making state-refiners more competitive like their private peers. Cheaper crude means better margins for refiners. Officials at all three OMCs said that with board-level committees in place, spot crude purchases now happen in hours against days earlier, helping them avail of some discounts. The earlier tender method would take nearly a week, shutting them out of deals which had to be struck quickly.

B. Ashok, chairman, IOCL had on 14 September said, “Earlier, we used to take 26 hours to finalise our spot tenders but today we have reduced the time to two hours. We believe that this alone should be able to give an advantage of 20-30 cents or probably more because of reduction.”

“The OMCs will take a long time to learn the nuances of trading. Their processes are still archaic. While Reliance Industries and Essar Oil freeze cargoes in less than an hour, OMCs still take longer than 24 hours sometimes. Besides, the OMCs still have a very cumbersome paper work process. So half the traders don’t want to bid with them,” an executive with an international oil trading firm said, requesting anonymity.

The executive added that because RIL and Essar Oil have single location refineries, it is easier for them to source crude.

“The OMCs do not have a very large component of crude as spot. So the savings may not be huge. But the good thing is, any saving is good. For the savings to be meaningful, either it has to be at least $1 per barrel or the component of spot crude should increase in the overall crude procurement portfolio of the OMCs,” said an analyst with a domestic brokerage, who did not wish to be identified.

An HPCL official said the new norms are working well but there is a lot to learn. “Definitely it is advantageous to all oil companies and over a period of time, we can see how much savings it results in,” the official said, asking not to be identified. HPCL did not reply to an email sent on 27 September.

The government has also allowed OMCs to scrap the tendering mechanism and set up an ‘integrated trading desk. But OMC officials said with each company planning its own trading desk, an integrated desk does not seem likely.

“Earlier, there were talks of an international trading desk where McKinsey was to handhold the OMCs for sometime but with the new procurement norms in place, there is no particular need for a combined trading desk as each company either has its own desk or is exploring the options of setting up a desk,” an HPCL official said.

While HPCL and BPCL are planning an international oil trading desk in Singapore, IOCL has a trading desk in Delhi.

Traders say OMCs are ill-equipped in dealing with spot crude oil purchases and they need to learn from private players like Reliance Industries and Essar Oil on deriving crude benefits of the relaxation in crude procurement norms.