IOC may use optionality clause for term crude, defer LNG imports: chairman
State-run Indian Oil Corp. may cut inflows of optional crude volumes under term contracts as well as ask its LNG term cargo suppliers to defer shipment schedules, as an extended lockdown takes a toll on domestic consumption, chairman Sanjiv Singh told S&P Global Platts in an exclusive interview.
Although there are signs that India’s energy demand is recovering as some operations resume, a sharp revival may not happen, prompting IOC to move cautiously in terms of buying crude as well as LNG, at a time when domestic stocks remain high, he added.
“In our term crude contracts we have a clause for fixed volumes as well as for optional volumes. This gives us some flexibility in absorbing the wide variation in demand without violating any contracts,” Singh said, adding that term crude volumes account for about 60%-70% of the total crude intake.
IOC has bulk of its term crude contracts with Middle Eastern suppliers, while it also has some term deals from West Africa, as well as relatively smaller deals for US crude cargoes.
Singh said that IOC would not be looking at sharply reducing spot crude purchases. Rather, it would keep an eye on attractively-priced offers.
“Most of our spot crude purchases have been low-sulfur cargoes. “Traditionally, high-sulfur cargoes have always been cheaper than low-sulfur cargoes. But off late many a times we are seeing low-sulfur cargoes quite attractive. So I can’t say outright that we will be cutting spot crude purchases,” he said.
LPG SHINES BRIGHT
Singh said that among all oil products, LPG, would witness robust year-on-year demand growth of 6%-7% in the financial year ending March 2021 as demand for home cooking had shot up during the lockdown. In addition, the government’s decision to free give LPG cylinder refills to more than 80 million poor households is also expected to support LPG demand.
“LPG is playing an import role in the success of the lockdown. With domestic use accounting for 90% of the demand, we expect a strong year of growth even though industrial demand has fallen, but the industrial segment is a smaller component of the demand,” Singh said.
S&P Global Platts Analytics expects India’s LPG imports in 2020 to rise by roughly 12% year on year primarily due to reduced refinery output, while LPG consumption would increase by slightly over 3% year on year.
As demand for petroleum products gradually rise, Singh said IOC had re-started several process units at its refineries that were down due to the lockdown. “Throughput is gradually rising but it will also depend on the demand response,” Singh said.
The refineries are currently operating at about 60% of their design capacities, he said. IOC has plans to scale up throughput to 80% of the design levels by the end of the month.
Platts Analytics expects India’s oil demand to contract by over one million b/d on the year in the second quarter and to remain lower on the year in H2, taking full-year demand decline to 355,000 b/d year on year.
“My personal assessment is that we will end the financial year ending March 2021 a little short of last year as far as oil products demand is concerned,” Singh said.
Singh said that closure of many downstream units had taken a toll on India’s LNG consumption. As a result, IOC would be deferring import arrivals of some of the cargoes under its term contracts.
“There will be some impact on contractual cargoes because if we can’t sell, we have to find a way. We have asked for deferrals that is always the first preference, not cancellations,” he added.
Singh said that the gap between spot LNG prices and the oil-linked LNG prices was also standing in the way of consumption. “Today, everyone is sensitive to the price. Therefore, this year we won’t see LNG demand growth to take place as expected. But for the longer term, we are on track.”
He said that the lockdown had delayed pipeline construction work at some LNG projects.
“We were very positive on the pipeline construction activity for Ennore terminal before the lockdown. We were hoping things would be completed by end of this year. But the project may get pushed back by a few months,” Singh said. “After the construction work is over we will see decent utilization of the terminal.”
Singh said that IOC was working with ExxonMobil on gaining experience and technical knowledge on delivering cost-effective natural gas in India, in ways other than traditional pipelines.
“It creates a virtual pipeline for LNG and helps small customers to get access to supplies. Separately, we are also working on a project called LNG on wheels which would look to replace CNG with LNG in larger trucks.”
Platts Analytics expects India’s LNG imports to be roughly 36 Bcm in 2020, up 10% from 2019 levels. The country’s total natural gas consumption is expected to grow to nearly 60 Bcm in 2020, up nearly 5 Bcm over 2019 levels. However, there is more risk to the downside given the decline in consumption due to the country’s lockdown restrictions.