Bangalore: A move by state-run oil refining firms to cut their annual shipping bills for importing crude oil has been thwarted by the country’s maritime regulator.
The Directorate General of Shipping (DGS) has rejected requests from state-run oil refiners to hire foreign ships for five years and longer to import crude.
Oil firms led by Indian Oil Corp. Ltd (IOC) had approached the regulator last year, claiming that longer contracts would check volatility in shipping costs, secure lower freight rates and cut their annual shipping bills.
Foreign ships can be hired by local entities for transporting their export or import cargo only when Indian ships are not available. Hiring foreign ships also requires permission from DGS.
Local preference: An oil tanker. Indian firms are allowed to hire foreign ships for up to two years only when Indian vessels are not available. Eddie Seal / Bloomberg
Hiring an Indian ship does not require permission from the regulator. DGS currently allows local entities, both public and private, to hire foreign ships for up to two years.
However, the number of Indian supertankers available to carry crude is fewer than what the oil firms need.
“The maritime regulator has told us that the present system will continue in the best interests of developing India’s shipping fleet,” said an executive at IOC. He did not want to be named because of company policy.
An official at the regulator confirmed the development. He also declined to be named. The oil firms’ demand was also opposed by the local industry body, the Indian National Shipowners’ Association (Insa).
The oil firms approached DGS after the Planning Commission, India’s apex public policy body, said last year that crude transportation costs were very volatile and asked state-run oil companies to make long-term arrangements to secure lower freight rates.
The freight rates for shipping crude oil into India on so-called supertankers, or very large crude carriers, have witnessed extreme swings from as high as 200 Worldscale points to as low as 30 Worldscale points over the past few months, the IOC executive said.
Worldscale points are a percentage of a nominal rate, or a so-called flat rate, for a specific route. Flat rates, quoted in dollars per tonne, are revised annually by the London-based Worldscale Association to reflect changing fuel costs, port tariffs and exchange rates.
A year earlier, supertankers cost around $55,000 (around Rs26 lakh) a day for a two-year period, and about $85,000 for a year. That has since dropped to $30,000-35,000 a day for a two-year contract, said an executive at a Mumbai-based ship chartering firm. He also did not want to be named.
IOC imports around 40 million tonnes (mt) of crude a year, 60% of it in supertankers, and spends at least Rs1,400 crore a year to ship it to its refineries in the country.
Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd import around 12mt each of crude a year to feed their refineries.
Oil firms, however, justified their demand.
“When a ship is hired for a longer period, the freight rates are lower, “ the IOC executive said.
With IOC’s crude imports slated to rise over the next five years, the company wants to avoid exposing such a large cargo to spot market risks.
“To check the volatility in freight rates, we are of the view that some kind of a shipping fleet security should be available to IOC,” the IOC official said.
On 4 February, the Reserve Bank of India allowed oil refining companies to hedge their freight risks to avoid volatility in transportation costs, but only up to a year.