New Delhi: With the US sanctions on Iran looming, Moody’s Investors Service has estimated an around $500 million decline in earnings for Indian state-owned refiners, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), on account of substituting crude oil imports from the Persian Gulf country.

President Donald Trump pulled the US out of a historic 2015 accord with energy-rich Iran, which was signed to curb the Islamic Republic’s nuclear programme in return for ending sanctions. The development assumes significance for India, which is the world’s third largest oil importer and had been ramping up supplies from Iran, its biggest supplier after Iraq and Saudi Arabia.

According to Moody’s, India is one of the biggest buyers of Iranian crude, accounting for about 30% of total crude exports from Iran during April to August 2018. Also, India imported 220.4 million metric tonnes (million MT) of crude oil in the year ended March 2018, out of which about 9.4% was from Iran. Between April and August 2018 India imported 94.9 million MT of crude, of which about 14.4%, was from Iran. Exports to India accounted for 21% of Iran’s crude oil exports in the fiscal year ended March 2018 and 30% from April to August 2018.

“Assuming a complete cessation of imports of crude oil from Iran and a $3 per barrel negative impact on earnings because of that on the barrels being substituted, we estimate the total decline in earnings for the Indian refiners to be about $400-$500 million, against combined EBITDA of about $10 billion for the three largest state-owned Indian refiners in the fiscal year ended March 2018," Moody’s Investors Service wrote in its report.

This comes in the backdrop of Brent crude oil spot prices breaching the $80 per barrel mark, and retail diesel and petrol prices in India continuing to set new records every other day. Transportation fuel prices touched a new high on Thursday, with diesel and petrol prices reaching 74.24 per litre and 83 per litre in Delhi, respectively. Petrol and diesel now cost 90.35 per litre and 78.82 per litre, respectively, in Mumbai.

The cost of the Indian basket of crude rose to $80.96 a barrel on 26 September, according to the Petroleum Planning and Analysis Cell. To this, taxes at the central and state levels are added, besides dealers’ commission, to arrive at the retail price. The Indian basket represents the average of Oman, Dubai and Brent crude.

“We expect Indian refiners will either have to significantly reduce or completely stop importing crude oil from Iran over the next month or so. As a result, Indian refiners will increase dependence on the remaining Middle Eastern crude oil suppliers (mainly Saudi Arabia and Iraq). Iranian crude is usually sold at a discount of up to $2-$4 per barrel to other Middle Eastern crude oil grades. Iran’s national oil company, National Iranian Oil Company, also subsidizes the freight costs for crude oil delivery and offers extended payment terms to buyers," the Moody’s report added.

India’s increasing dependence on other West Asian suppliers comes at a time when customers from Asia are seen paying a so-called Asian premium owing to this dependence as compared to prices paid by the US or the EU. India has consistently pitched for a price and terms correction. Also, India has proposed a consumers’ collective comprising major energy buyers: China, India, Japan and South Korea.

However, despite demands of a rollback of the hike in fuel prices by opposition parties, the National Democratic Alliance (NDA) government has not intervened in the price rally. Any rally in global crude oil prices will affect India’s oil import bill and trade deficit. Every dollar increase in oil prices will push up the import bill by around 10,700 crore on an annual basis.

Of the 8 trillion of excise, service tax and GST collected last year, petroleum and petroleum products accounted for 36%, says CARE Ratings. Petroleum products accounted for around 20% of states’ tax revenues.

Petroleum Minister Dharmendra Pradhan on Wednesday said reducing taxes won’t have any lasting impact due to the continuing volatility in crude prices. He added that the government was looking at ways to offer relief to consumers.

“The basic problem is that crude prices are volatile. The effect of any measures, including reduction in VAT by the states and the excise duty by the Centre, will not last long due to the volatility in crude prices," he told reporters.