Indian oil refiners are exploring the opportunity of importing Canadian crude oil in their quest of diversifying sources to secure supply amid rising geopolitical tensions, Atanu Mukherjee, CEO of Dastur Energy—an energy consultancy firm—told Moneycontrol in an interview.
Supplying crude oil to India also comes as an advantageous decision for Canada, which currently exports nearly all of its oil to the US, as the two North American countries face trade challenges.
“Canada is now seeking to diversify away from its near-total dependency on US refiners—especially with recent and potential tariff changes. This creates a clear arbitrage opportunity for India. Much like the pivot India made to Russian Urals post-Ukraine, Canadian heavy crude can be sourced at a discount, increasing our GRMs (gross refining margins, a measure of profitability) and enabling refined product exports to geographies like Europe, Africa and Southeast Asia,” said Mukherjee.
India, a net importer of crude oil, is dependent on imports for nearly 90 percent of its domestic supplies. In the wake of conflicts including the recent Iran-Israel tensions and the 2022 Russia-Ukraine war, India has been looking to broad-base its sourcing as domestic oil demand is also rising.
As of now, Canada does not supply crude oil to India, primarily on account of it not having the suitable framework and because the very large bulk of its production is being supplied to the US. With oil pipeline infrastructure necessary to transport oil to Asian countries including India and China now developed in Canada, the country is looking at alternative destinations for its oil.
“Until recently, Canada lacked the infrastructure to move its landlocked Alberta crude to international markets. The Trans Mountain Expansion Project (TMX) has changed that—it now enables around 900,000 to 1 million barrels per day (bpd) to be shipped from Alberta to the Pacific Coast,” said Mukherjee.
According to Dastur Energy, China has already ramped up imports of Canadian crude from 7,000 to 300,000 bpd. India, too, has the capability to process sour Canadian oil as the country’s refineries are some of the most complex in the world.
Higher complexity of a refinery enables it to process sour grades of crude oil, which are cheaper than other grades, improving the margins of the oil companies.
“India has both the technical capability and strategic need to diversify its crude basket. So there’s a window of opportunity to secure long-term supply contracts at favourable economics,” said Mukherjee.
Longer freight a challenge?
Compared to Middle Eastern suppliers such as Saudi Arabia, Iraq and Kuwait, higher costs on account of the longer shipment routes pose a challenge in importing crude oil from countries such as the US and Canada. However, the overriding need is to ensure energy security and insulate itself from supply shocks originating from geopolitical challenges, which is why India, while negotiating for better discounts, is also looking at higher crude imports from non-traditional suppliers too.
Mukherjee believes steeper discounts from Canada and, eventually, a term contract for crude oil would offset the longer freight challenge for Indian refiners.
“While freight time is longer—35 days versus seven days from the Middle East—the cost differential is just 80 cents to $1 per barrel. This is easily offset by the $5-$10 discount on Canadian crude. When you run the numbers, the landed cost of WCS (Western Canadian Select, the category of the fuel produced from the Alberta oil sands) in India becomes highly competitive, especially for complex refineries,” said Mukherjee.
To be sure, India’s Reliance Industries Limited (RIL) has already purchased a pilot shipment from Canada of around 2 million barrels. “It’s a sign of early momentum. However, full-scale imports will depend on infrastructure, trade logistics and, of course, strategic intent on both sides. But the early indicators are promising,” said Mukherjee.
As of now, India’s private refiners are more upbeat about importing oil from Canada compared to government-owned oil marketing companies. State-run refiners include Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited, while leading private oil companies include RIL and Nayara Energy Limited.