In­dia, China join hands to set up oil buy­ers club

Financial Chronicle - - FRONT PAGE - FC BUREAU

WITH Opec ini­ti­ated pro­duc­tion cuts play­ing havoc with oil prices, In­dia has de­cided to break the dom­i­nance of the oil car­tel by forg­ing a strate­gic al­liance with China to set up an ‘oil buy­ers club.’ The group­ing would get a bet­ter bar­gain­ing power to ne­go­ti­ate bet­ter terms with sell­ers. In­dia and China are among the largest economies in the world and the two are also the big­gest im­porters of oil. With the two coun­tries join­ing hands, oil mar­ket could quickly turn from sell­ers mar­ket to buy­ers mar­ket.

Af­ter main­tain­ing a steady de­cline in 201516, oil prices have be­gun to rise since the mid­dle of the last year and the in­crease has picked up pace in the last cou­ple of months. Crude oil price has surged by al­most $10 to $80 per bar­rel in the last one-and-a-half months. In fact, with in­ter­na­tional oil prices hit- ting a four-year high last month, retail price of petrol and diesel in In­dia in­creased by up to Rs 4 per litre.

The idea for ‘oil buy­ers club’ was floated by petroleum and nat­u­ral gas min­is­ter Dhar­men­dra Prad­han at the In­ter­na­tional En­ergy Fo­rum (IEF) held at New Delhi in April.

To take the process for­ward, In­dian Oil Cor­po­ra­tion (IOC) chair­man San­jiv Singh trav­elled to Bei­jing early this month to meet Wang Yilin, chair­man of China Na­tional Petroleum Cor­po­ra­tion (CNPC), sources privy to the devel­op­ment said.

Among the set of ideas be­hind the pro­posed buy­ers club is get­ting ad­di­tional quan­ti­ties of US crude to Asia to keep the oil car­tel un­der pres­sure and pre­vent it from tak­ing de­ci­sions that could im­pact volatil­ity in the oil mar­ket and take prices up. The Or­gan­i­sa­tion of Petroleum Ex­port­ing Coun- tries (Opec) is the largest sup­plier of crude oil to In­dia and ac­counts for 60 per cent of the coun­try’s oil needs.

The devel­op­ment has come at a time when even the US has ex­pressed its un­ease over Opec’s at­tempts to keep oil prices high by cap­ping its pro­duc­tion. “Oil prices are too high, Opec is at it again. Not good!” US pres­i­dent Don­ald Trump tweeted.

The plan is to bring in other ma­jor Asian oil buy­ers such as Korea and Japan into the club so that their united voice is heard louder by the sup­pli­ers who con­tinue to charge a pre­mium on crude oil sup­plies into Asia.

In­dia is the world’s third- largest oil im­porter af­ter China and the US. Japan is the fourth largest im­porter and South Korea is right be­hind it. The four na­tions ac­count for over a third of the oil im­ports in the world.

At the IEF meet­ing, In­dia and China agreed to join hands to have a col­lec­tive bar­gain­ing power against carteli­sa­tion of oil pro­duc­ers. Singh’s visit was to take this for­ward with con­crete pro­pos­als for co­op­er­a­tion, sources said.

So far, In­dia has not been able to bar­gain bet­ter rates from the west Asia-based pro­duc­ers of the oil car­tel Opec. In­stead of get­ting a dis­count for bulk pur­chases, pro­duc­ers such as Saudi Ara­bia, charge a so-called ‘Asian Pre­mium’ for ship­ments to Asian buy­ers, in­clud­ing In­dia and Japan, as op­posed to Europe.

Ac­cord­ing to ex­pert es­ti­mates, the Asian Pre­mium an­nu­ally costs some­where around $5-10 bil­lion for Asian im­porters.

The idea for a buy­ers club is not new. In fact, this is In­dia’s third at­tempt to unite ma­jor Asian en­ergy im­porters to beat the pro­duc­ers’ car­tel.

In 2005, the then oil min­is­ter Mani Shankar Ai­yar had hosted two min­is­te­rial round­tables to im­press upon the need for a rea­son­able oil pric­ing and get­ting rid of dis­crim­i­na­tory Asian Pre­mium — the first in­volved ma­jor Asian con­sumers such as China, Japan and South Korea and the other roped in al­ter­na­tive oil pro­duc­ers of North and Cen­tral Asia.

Ai­yar pro­posed a com­mon front on oil to China’s Na­tional Devel­op­ment and Re­forms Com­mis­sion vicechair­man Zhang Xiao­qing. That pro­posal re­sulted in a mem­o­ran­dum of un­der­stand­ing in 2006 but it was lost in the com­plex­i­ties of bi­lat­eral ties.

An­other at­tempt for joint en­ergy sourc­ing with Japan was made to­wards the end of the UPA gov­ern­ment when Veer­appa Moily was the oil min­is­ter. It, too, failed to see the light of day.

At the 16th IEF min­is­te­rial meet in April this year, In­dia and China, which to­gether ac­counted for 17 per cent of world oil con­sump­tion last year, agreed to look for ways to lever­age the com­bined size of their im­ports for a bet­ter bar­gain from West Asian crude pro­duc­ers.

By 2023, oil de­mand will hit 104.7 mil­lion bar­rels per day, up 6.9 mil­lion bpd in 2017, ac­cord­ing to the In­ter­na­tional En­ergy Agency. “As has been the case for some years, China and In­dia to­gether will con­trib­ute nearly 50 per cent of global oil de­mand,” the agency had said in a re­port.

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