As China suspends fuel contracts, Indian firms go bargain hunting
Indian firms are on a hunt for bargains on diverted cargoes of crude oil and liquefied natural gas (LNG), with Chinese energy majors declaring force majeure to avoid taking delivery of some cargoes, said several people aware of the development.
India is the world’s third-largest crude oil buyer and the fourth-largest LNG importer. It consumes 145 million standard cubic metres a day (mmscmd) of gas.
A novel coronavirus outbreak in China has caused oil demand to plunge in the world’s second-biggest economy, forcing state-run CNOOC, China’s biggest LNG importer, to suspend contracts. Several refineries, including Sinopec, the world’s largest refiner, plan to reduce output or shut plants. This has also led shipping rates to fall. Trade tensions and a slowing global economy also have an overhang on energy markets.
“Indian buyers thus have a window of opportunity to avail distress deals available on sea bound crude and LNG, meant for consumption in China,” said Debasish Mishra, partner at Deloitte India.
This comes against the backdrop of oil markets facing a situation called contango wherein the spot price is lower than a futures contract.
Concerned over the situation, the Organization of the Petroleum Exporting Countries (Opec) may advance its 5-6 March meeting, with its technical panel recommending a provisional cut to the Opec plus arrangement.
According to S&P Global Platts, “30 to 60 million barrels of oil already purchased and on its way to China will need to be either resold and/or kept in storage for future use.”
India is a key Asian refining hub, with an installed capacity of more than 249.36 million tonnes per annum (mtpa) through 23 refineries. Large Indian refiners include Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), Nayara Energy Ltd (formerly Essar Oil). and Reliance Industries Ltd.
“Sinopec plans to reduce throughput by around 10% of its total 5.89 million b/d capacity in February,” S&P Global Platts said.
The state-run Petronet LNG Ltd said the company is not “contracting such cargoes”, said its managing director and chief executive Prabhat Singh. “There is anyway a glut in the market and it will reflect in spot buying. While it is not an ethical thing to do, nor is right from the corporate governance point of view, a market will behave like a market,” he said.
India is building up its LNG portfolio with local firms having inked long-term LNG contracts totalling 22mtpa. It has also been trying to renegotiate its LNG contracts with companies exploring strategies such as time swap of volumes, destination swaps, and contract on free on board basis to reduce the final fuel price.
An IOC spokesperson declined comment. Queries emailed to the spokespersons of BPCL, HPCl, Nayara Energy Ltd, and RIL late on Friday evening remain unanswered.
Meanwhile, the Indian industry has also been impacted by the coronavirus epidemic. Mint reported on 6 February about domestic power project developers who source solar modules from China planning to declare force majeure on meeting project completion deadlines because of supply disruptions following the coronavirus outbreak.
Domestic companies are bracing for production shortages, disruption in shipments, and scarcity of critical bulk drugs and life-saving antibiotics as a result of a travel clampdown in China, which is battling to contain the epidemic. India imports more than $70.3 billion worth of goods from China and exports $17 billion.