Daily Times

On Oct. 2, a cargo of 1.6 million barrels of US crude oil was received at Paradip port, the first import by India of American oil. The political importance of this was underscored by the presence at the port of senior Indian and US officials.

A press release circulated by India’s Ministry of External Affairs spoke of “a new chapter in the history of Indo-US trade” emerging from the “strategic partnership of global significance” that was shaped during Prime Minister Narendra Modi’s visit to the US in June 2017. The contracts to supply Indian refineries were signed within a month of the visit, and involve the total supply of 7.85 million barrels to three government refineries in the coming months.

The shale revolution made the US self-sufficient in hydrocarbons from the end of the last decade. This, along with an economic downturn in Europe and reduced Chinese imports, led to a market glut and falling oil prices, which reached a low of $26 per barrel in January 2016.

In response, the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC partners have withdrawn about 1.8 million barrels per day (bpd) from the market and boosted prices. In August this year, the price of Western Texas Intermediate (WTI), the US benchmark, was $52 per barrel. This upward swing in prices has made the US a competitor for traditional Middle Eastern producers in world markets.

It exported a record 1.3 million bpd at the end of May, with 40 percent going to Asia. This thrust toward Asia has a political dimension as well. At the end of June this year, President Donald Trump said his administration would make the US “energy dominant,” a variation on the consistent presidential theme of making the country energy independent. He thus made clear that buying US oil and gas is the route to earning his administration’s goodwill.

Trump conveyed this quite clearly to Modi during their meeting in June, when the two leaders agreed to pursue “a fair and reciprocal trading relationship,” with a special focus on the energy sector. Modi responded with the three quick contracts in July. As the first oil cargo was loaded in August, Trump assured the prime minister that the US will “continue to be a reliable, long-term supplier of energy.”

But Indian oil executives have emphasized that they are only motivated by economic considerations. The crude being imported from the US is conventional sour, moderate sulfur crude that is similar to crudes traditionally imported by Indian refineries from the Gulf.

This US crude has for now become competitive vis-a-vis Gulf crudes due to prevailing market conditions. Production cuts by OPEC and some non-OPEC partners, including Russia, have boosted the benchmarks Brent and Dubai in which Gulf crudes imported by India are designated, with the price gap even making up for the higher cost of transportation. This scenario could change quite quickly in the prevailing volatile market.

Hence Indian oil executives have clarified that future purchases from the US will only be based on competitive tenders, rather than the long-term contracts they have with Gulf suppliers.

India is the third-largest consumer of oil globally, and imports most of its requirements: In 2016-17, it imported 214 million tons, 5.4 percent more than the previous year. The International Energy Agency (IEA) has said by 2040, India will be at the center of the world energy scenario, with its demand being close to that of the US, mainly due to surging demand for new infrastructure, electricity and transport.

In terms of India’s long-term scenario, the draft national energy policy document recently circulated by the Niti Aayog, the government’s economic think tank, indicates that despite the focus on renewables in the report, the share of fossil fuels (coal, oil and gas) in the national energy mix remains largely the same in 2012-40, moving from 81 percent in 2012 to 79.4 percent in 2040.

More importantly, India will remain import-dependent in respect of fossil fuels, with hardly any difference between the present and 2040. Oil imports will be between 81 and 90 percent, coal imports will be about 26 percent, and gas imports 20 percent.

Middle East supplies will be central to India’s quest for energy security. In 2015, the IEA, in its India Energy Outlook for 2014-40, projected that the country’s crude oil demand in 2040 will stand at 7.2 million bpd, and that India will import more than 90 percent of its requirements. Middle East suppliers would meet more than 60 percent of its imports, with just 10 percent coming from North America.

The conclusion is unavoidable: Supplies from the US have little to do with India’s energy security interests. The latter will remain tied to the Gulf, and will continue to have an abiding stake in the region’s security and stability. This has far greater importance than its engagements with marginal suppliers 25,000 km away.

Published in Daily Times, October 9^th 2017.