Barmer crude: IOC not convinced about Cairn’s crude swap mechanism
New Delhi   18-Mar-2014

IndianOil Corporation Ltd (IOC) is not interested in Cairn India’s proposed crude oil swap mechanism, as the public sector refiner does not see it to its advantage.

To get true value for its crude oil from Barmer, Rajasthan, Cairn has been engaging with oil companies and Japanese power utilities to work out a swap arrangement of domestically-produced oil with imported crude. Under the arrangement, for each barrel of Rajasthan oil delivered to an international buyer, an equal volume of imported crude would be offered to the domestic refiner at competitive terms.

IOC, however, is concerned about these ‘competitive terms’. “It is not clear at what price Cairn will be selling this swapped crude. We have to see how commercially viable it will be,” an IOC official said.

At present, India does not allow export of domestically-produced oil and gas as it is yet to attain self-sufficiency. This is one of the reasons, besides having more transparency in the deal, that Cairn has proposed involving a public sector refiner.

Besides giving it a better price from South East Asian refiners, Cairn sees better value coming from Japanese power utilities, which use crude similar to what is produced in Rajasthan.

Today, IOC (standalone) is importing a significant portion of its crude oil requirement of 54.2 million tonnes, mostly on term contracts, from countries such as Iraq, Kuwait, Dubai and Saudi Arabia, and at international prices. The price at which Indian refiners sourced their crude in March has been cruising around $105 a barrel.

Rajasthan crude is sold at a 12.5 per cent discount to Brent and has averaged $95.6 a barrel till the third quarter of the current fiscal. According to Cairn, the reason for proposing a swap mechanism is realisation of true market value of the Rajasthan crude, which it feels will be higher than what it is currently getting from domestic refiners. In a letter to the Petroleum and Natural Gas Ministry, when pitching for the swap mechanism, Cairn said, for domestic refiners, it will ensure consistent supplies of desired crude grade. Most Indian refiners are unable to process Barmer’s low sulphur, high wax content crude.

The domestic refiners have to blend it with other crude varieties for transporting and processing because of refinery configurations that restricts use of all crude varieties. The mechanism will also get them better refinery margins and reduce dependency on spot purchases, Cairn said.