Drone strikes on world’s biggest oil producer worry Indian energy planners
5 min read 15 Sep 2019, 09:15 AM ISTSaudi Arabia is a crucial source of energy for India and the second largest supplier of crude and cooking gas to IndiaAny spike in global crude prices will impact India’s oil import bill and trade deficit
PremiumNew Delhi: With the drone strikes on the world’s biggest oil producer, Saudi Arabian Oil Co or Saudi Aramco disrupting around 5% of the global oil supply and exacerbating tensions in the Persian Gulf, India -- the world’s third largest oil importer -- is keeping a close watch on the situation.
While the reported strikes by 10 drones at Abqaiq and Khurais oil facilities, disrupted around half of Saudi Arabia’s oil capacity, the US has blamed Iran for the attacks. Even as Yemen's Houthi rebels have also claimed responsibility for the audacious attacks, traders worldwide are speculating if oil prices will cross the $100-mark yet again.
“This is an exceptional situation. We are keeping a close watch," said an Indian government official requesting anonymity.
Saudi Arabia is a crucial source of energy for India and the second largest supplier of crude and cooking gas to India. Any spike in global crude prices will impact India’s oil import bill and trade deficit. Every dollar increase in the price of oil raises the import bill by around ₹10,700 crore on an annual basis. India spent $111.9 billion on oil imports in 2018-19.
“Saudi Aramco emergency crews contained fires at its plants in Abqaiq and Khurais, as a result of terrorist attacks with projectiles. These attacks resulted in production suspension of 5.7 million barrels of crude oil per day," Saudi Aramco said in a statement.
Amin H. Nasser, Saudi Aramco President & CEO, added in the statement, “We are gratified that there were no injuries. I would like to thank all teams that responded timely to the incidents and brought the situation under control. Work is underway to restore production and a progress update will be provided in around 48 hours."
Analysts believe that in the backdrop of the extension of production curbs compact by the Organization of the Petroleum Exporting Countries (Opec) and Russia, the developments mark the building of a ‘perfect storm’ for the global oil markets. India is particularly vulnerable as it is the world’s third-largest oil consumer — importing more than 80% of its oil requirements and around 18% of natural gas.
The National Democratic Alliance (NDA) government is concerned about volatility in crude oil prices and its impact on Indian consumers amid a slowing domestic economy, adverse external headwinds such as the US-China trade war and fears of a global recession.
With president Donald Trump pulling the US out of a historic 2015 accord with energy-rich Iran that was signed to curb the Islamic Republic’s nuclear programme in return for ending sanctions; there have been escalation of attacks in the strategic Strait of Hormuz— that accounts for a fifth of global oil supplies movement.
“Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy. Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen," US secretary of state Michael Richard Pompeo said in a tweet.
International crude oil prices peaked at $147 per barrel, clocked in July 2009. Global oil prices have been subdued with the West Texas Intermediate (WTI) and Brent crude futures trading lower at $54.85 and $60.25 per barrel respectively on Friday.
“We call on all nations to publicly and unequivocally condemn Iran’s attacks. The United States will work with our partners and allies to ensure that energy markets remain well supplied and Iran is held accountable for its aggression," Pompeo added.
Energy security remains paramount for India. As part of India’s energy diplomacy, oil minister Dharmendra Pradhan recently concluded his visit to Saudi Arabia, United Arab Emirates and Qatar. Indian strategic planners have been worried over short-term supply disruptions, given that the country’s energy needs are primarily met through imports. Any spike in international crude oil prices will also affect India against the backdrop of factors such as the US administration also imposing sanctions on state-owned oil company Petrуleos de Venezuela SA (PDVSA).
Retail prices of petrol and diesel in India track global prices of these fuels, not crude, but they are broadly linked to crude oil price trends. While sourcing crude from other suppliers is not an issue, the price at which it is bought will impact the Indian economy. Higher energy prices stoke inflation and will hurt the country’s economic growth.
“The IEA is monitoring the situation in Saudi Arabia closely. We are in contact with the Saudi authorities as well as major producer and consumer nations. For now, markets are well supplied with ample commercial stocks," said the Paris-based International Energy Agency (IEA) on Saturday.
The world’s premier energy monitor’ statement holds importance given that its member countries maintain emergency oil reserves equivalent to at least 90 days of net imports. Strategic crude oil reserves allow a country to counter short-term supply disruptions. They are state-funded and meant to tackle emergency situations.
The price of the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, were subdued ahead of assembly elections in Maharashtra, Haryana and Jharkhand. India’s economy reported its weakest growth in more than six years at 5% in the June quarter.
The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in FY17 and FY18, respectively, was $59.35 in August 2019, according to data from the Petroleum Planning and Analysis Cell (PPAC). The average price was $60.05 a barrel on 12 September.
India has an existing storage capacity of 5.3 million tonnes and is also working on the second phase of strategic petroleum reserves. The government in June approved construction of an additional 6.5 million tonnes of strategic crude oil reserves. These facilities together will help support 22 days of India’s crude oil requirements.
Saudi Aramco also holds importance for India’s energy security architecture. In the backdrop of its global IPO, Aramco has partnered to jointly develop the massive refinery and petrochemicals complexes in Maharashtra. In a deal valued at $15 billion, the Gulf nation’s national oil company is also in the process of buying a 20% stake in the Reliance Industries Ltd (RIL) flagship chemicals and refining business, as the Indian company seeks to cut its massive debt and secure an assured supply of crude oil to its refineries.
