The steep fall in domestic energy demand driven by the COVID-19 pandemic has impacted India’s oil refining sector amid an oil price war and a severely stressed global petro-order.
Reuters had earlier reported that Indian Oil Corporation (IOC), the refining heavyweight, and Mangalore Refineries and Petrochemicals Ltd. (MRPL), have served force majeure notices to their Middle Eastern crude suppliers, citing the Coronavirus epidemic — a Black Swan event. Force majeure notices are built into contracts, which relieve companies from making payments due to unforeseen calamities such as wars and natural disasters.
According to Reuters, IOC, which owns about a third of the country’s 5 million barrels per day (bpd) refining capacity, has sent a force majeure notice to most Middle Eastern suppliers. MRPL has already shuttered a third of its 300,000 bpd refining capacity.
Problem of plenty
Energy demand in India has plummeted as lockdowns, enforced to contain the spread of COVID-19 infections, have derailed the economy — they have included grounding of flights, and brought vehicular transportation to a standstill.
The stress in India’s refining sector follows extreme turbulence in the global energy eco-system. On Monday, U.S. oil briefly plummeted to less than $20 a barrel, breaching a major psychological marker. Apart from the meltdown in demand, the oil glut in the market is unveiling another major problem — that of storing excess crude. Freight rates of supertankers, which can store and transport large volumes of oil, are climbing as traders scramble to secure them for storage.
The problem of plenty is also driven by a savage price war between Saudi Arabia and Russia. Earlier this month, Saudi Arabia, the leader of the oil cartel Organisation of Petroleum Exporting Countries (OPEC), and Russia, failed to agree on production cuts to shore up oil prices which were already in free fall due to the COVID-19 pandemic. In retaliation, the Saudis declared that they would ramp up production of cheap oil to grab shrinking market share — a move that Russians said they would mirror. Oil prices plummeted to $33 a barrel following the Riyadh-Moscow feud. That, in turn, badly hit the United States, whose shale oil producers need a much higher price to make their relatively high cost production sustainable.
Amid the turbulence in the energy sector, a riveting back story is also unfolding, pitting three major players against one another — Saudi Arabia, Russia and the U.S., which is currently the world’s largest daily producer and has, in the last decade, brought into the market its previously inaccessible shale oil.
Unsurprisingly, oil diplomacy triggered by COVID-19 is now reaching centrestage, with Washington reaching out to Saudi Arabia — its trusted postwar ally — to possibly define an exclusive bilateral arrangement, outside the OPEC, to put to floor under energy prices that are in free fall. The Wall Street Journal is reporting that the U.S. Energy Department officials were trying to convince the Trump administration to exhort Saudi Arabia to quit the OPEC, and, instead, work with the United States to stabilise prices. On March 23, Bloomberg Television quoted U.S. Energy Secretary Dan Brouillette as saying that an oil alliance with Riyadh was one of “many, many ideas” being aired by U.S. policymakers.
The shale oil lobby in the U.S. is apparently also pushing the administration to lock Saudi Arabia in heightened energy diplomacy. In a letter to Keith Krach, the Undersecretary of State for Economic Growth, Energy and the Environment, Congressman Michael McCaul said: “We cannot… allow our industries to become the victim of someone else’s price war, so I ask you to continue utilising every tool at your disposal to press Saudi Arabia and Russia to cut production.”
Amid the U.S.-Saudi Arabia diplomatic tango, Russia is signaling that it may now be ready to consider a new production arrangement with OPEC and other countries as part of OPEC+. “We are in contact with Saudi Arabia and a number of other countries. Based on these contacts we see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets,” said Kirill Dmitriev, head of Russia’s sovereign wealth fund, in an interview with Reuters.
Separately, Daniel Yergin, an energy historian said in an article in The Washington Post on March 25 that the G-20 countries, comprising both producers and consumers, should play a leading role in ensuring global energy security. “That would permit a discussion going beyond the present Russia-Saudi impasse, bringing in the United States and a larger group of producers and consumers, including Brazil, China, France,” and others, Mr. Yergin observed.
On Monday, the wheels of diplomacy were turning rapidly, with U.S. President Donald Trump declaring that he would be speaking to his Russian counterpart, Vladimir Putin, to discuss the Saudi-Russian price war. “Right after this call, I am speaking to a gentleman named Vladimir Putin,” Mr. Trump said on Fox and Friends. He stressed that the two will be talking about energy “among other things”, pointing out that Russia and Saudi Arabia “both went crazy” about oil, according to a CNN report.
News Source: The Hindu