Energy trade is not just about securing supplies–it is also about securing demand. News reports suggest that Russia’s state-owned oil company, Rosneft, is close to acquiring a stake in India’s private sector refiner Essar Oil. In its official statement, Essar Oil said there were no developments so far that require an update to the stock exchanges. However, if there were no discussions underway, the company could have simply issued a denial–so there is a possibility that such a deal may be in the making.
Reports say Rosneft will buy one share less than a 50% stake in Essar Oil. It may also need to make an open offer for another 26% of the shares under the Indian law governing significant acquisition of shares. If this happens, Rosneft will have a controlling stake in an oil refinery that can process 20 million tonnes of petroleum every year, and a network of 1,876 petrol pumps.
This is a reversal of the usual trend. So far, India has been investing in oil and gas fields in Russia–ONGC Videsh Limited has a stake in the $10-12 billion Sakhalin-1 project and in 2009, acquired Russia-based Imperial Energy for $2.1 billion. Both of these investments are part of a bid to secure India’s energy supplies.
Rosneft is among the world’s largest oil producing companies, with daily oil production of 4.2 million barrels: more oil than is consumed by India. So why is Rosneft interested in acquiring a downstream asset?
The deal, or the speculation around it, underlines a new, emerging dynamic in the oil market, where buyers and consumers have had more bargaining power than suppliers.
Russia is one of the world’s top oil producers, pumping out 10.8 million barrels per day, while India is the fourth largest oil consumer, consuming 3.8 million barrels of petroleum products per day. However, as of now, there is very little direct oil movement between India and Russia because of logistical reasons.
During FY14, India imported 189.2 million tonnes (approximately 3.8 million barrels per day) of petroleum, of which Russia accounted for only 0.27 million tonnes, or 0.16per cent.. Russia’s oil exports travel via the Black Sea or through the Pacific. In both cases, there are large markets close by: Europe and East Asia. Europe accounts for two-thirds of Russia’s oil exports and East Asia accounts for one-sixth.
However, this could soon change, and not for the better. Major European economies such as Germany, Italy and Spain presently meet 7%-12% of their energy needs from renewable power. This share could increase, alongside a consequent reduction in demand for fossil fuels.
The dropping demand in a key market could not have come at a worse time for the Russians, as a global increase in oil supplies by a massive 3.1 million barrels per day over the last year (according to the International Energy Agency), has caused stress to economies such as Russia, Venezuela and Iran, which depend on petroleum exports for a majority of their income. The abundance of oil makes it possible for European nations to now import more oil from other sources, following the geopolitical tensions over the Ukraine and European sanctions on Russia.
As a result, Russia may face a fall in demand from its most important market at a time when global supplies are increasing. Meanwhile, this demand is completely non-existent in the world’s fourth largest (and still-growing) oil market, India. Owning a strategic stake in an oil refinery and the downstream network of petrol pumps will provide Russia a path to the Indian market. India also exports refined petroleum products such as petrol and diesel, so this refinery can be used to service other regional markets as well.
By acquiring a large petroleum refinery, Rosneft is trying to secure its market.
Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.
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