Wednesday, December 02, 2015

Latin American contribution to India's energy security

Latin America has become a regular new source for India's imports of crude oil in the last fifteen years. In 2014-15 (April to March), the region supplied  36 million tons and held a 19% share in India's global imports of 189 mt . Out of the 700,000 bpd imported from the region, typically 400,000 bpd comes from Venezuela, 100,000 bpd each from Mexico and Brazil and about 50,000 bpd each from Colombia and Ecuador, depending on prices and availability.
It was Reliance which opened Latin America as an import source in 2000. Before that, Indian oil companies did not have the capacity to refine Latin American crude. The Reliance refinery established in 1999, with its versatile capacity to refine many crude varieties from around the world, was the first one to use the Latin American crude. Later, Essar has set up a similar refinery and the public sector oil firms have also followed this model now. 
In the past, there was another mental barrier of Indian business which was deterred by the distance factor and high freight cost. Reliance found a smart solution by making use of the VLCCs (Very Large Crude Carriers) which were coming empty from US after discharging the Middle Eastern crude there. The freight through this arrangement works out to just 2.5 to 3 dollars per barrel in comparison to 0.5 to 1 dollar from Middle East in regular oil tankers.
Reliance continues to be the leading importer of  Latin American crude with 400,000 bpd, while Essar and the Public Sector oil companies import about 150,000 bpd each. It is interesting to note that Reliance exports diesel to Brazil regularly. It amounted to 3.1 billion dollars in 2014-15.
India's global import of crude is projected to reach 7.2 million bpd from 3.7 m in 2014 and import dependency to go up from 70% of demand in 2014 to 90% in 2040, according to the November 2015 'World Energy Outlook' of International Energy Agency. The IEA  predicts India's dependency on Middle East to go up from 57% in 2014 to 63% in 2040.
It is India's strategic policy to reduce the over dependence on the politically unstable Middle East and diversify its crude import sources. This Indian objective fits in with Latin America's own strategy to cultivate India as a market for its crude exports.
Latin America has the potential and capacity to increase crude exports from its current 4.5 million bpd to over 7 million. The Venezuelans will be able to raise their production and exports, as soon as the political situation stabilizes. Brazil already has the capacity to increase exports. Mexican production will increase with the entry of private sector and foreign companies in the oil sector, made possible after the 2013 energy reforms. 
The region has discovered more new reserves in the last decade and its current total is 336 billion barrels, which is one fifth of the total global reserves of 1.4 trillion barrels. Venezuela has the world's largest reserves of 298 billion barrels and has overtaken Saudi Arabia's 266 billion barrels. 
Besides conventional oil, the region has 58 billion barrels of shale oil reserves, which is beginning to be exploited. Argentina has the fourth largest shale oil reserves of 27 billion barrels. Chevron has just started production in a joint venture with the Argentine national oil company YPF. Unlike the shale reserves near cities in US and the consequent controversies, the Argentine reserves are in the remote and sparsely populated Patagonia region. 
The US, which used to be the principal market for Latin American crude, has almost halved its imports and doubled its domestic production of oil, thanks to the shale revolution. Canada has eaten into Latin American share of the US market by steadily increasing its supplies. Canada itself has huge oil reserves.
So, the Latin American crude exporters are desperate for new markets and are targeting India along with China which have large markets with fast growing economies and consumption.  The Latin Americans are willing to give extra discounts to increase their market share. This gives additional bargaining power for India vis-a vis the Middle Eastern and other suppliers.
Indian companies have invested about 3 billion dollars in oil fields in Venezuela, Brazil and Colombia. OVL is the major investor with 2.5 billion dollars and the balance is by public sector oil companies, Videocon, Gammon India and Assam Oil Company. Given the current low prices of  crude and the oil fields, it is a good time for more acquisitions and investment in Latin America.
Crude oil imports from Latin America (20 billion dollars) accounted for 66 % of the total imports of 30 billion dollars and 46% of the total trade of 43 billion with the region in 2014-15. The total trade figure goes up or down corresponding to the crude oil price fluctuation. In any case, crude imports will continue to be the largest part of Indo-Latin American trade in the future. India can source 20 percent or more of crude regularly from Latin America and can count on the region as a reliable contributor to its energy security.

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