India-US trade oil in troubled waters over wave of protectionism

On March 29, when the first American shale gas lands at Dabhol regasification terminal in Maharashtra, US president Donald Trump’s war cry against trade imbalances will be partly addressed. Trump earlier this month ordered imposing duty on steel and aluminium imports from all countries except Canada and Mexico, unleashing what is being seen as a “trade war” that goes against the spirit of the World Trade Organisation. Protection of domestic industry and generating employment are the underlying reasons for imposing these duties, under section 232 of the Trade Expansion Act that applies in cases where national security is at risk.

Though India, in principle, is against the imposition of the duties, the direct hit on Indian steel and aluminium exporters is not much. At the same time, oil and gas imports from the US could mean India addressing some of Trump’s concern. The US is the second biggest trading partner of India after China but India enjoys a trade surplus with it.

Earlier this month, one of America’s leading LNG player, Cheniere Energy, dispatched its first shipment of natural gas to India from its Sabine Pass LNG terminal in Louisiana. The Houston-based company had in December 2011 signed a 20-year sale purchase agreement (SPA) with GAIL India, to supply 3.5 million tonne per annum (mtpa) LNG annually starting 2018.

Besides Cheniere, GAIL has a contract with Dominion Energy’s Cove Point liquefaction plant for the supply of another 2.3 mtpa in 2012. The landing of American LNG is coming after India received its first consignment of crude oil from the US at Paradeep in Odisha last year on October 2. This was followed by another oil cargo that came at Vadinar port in Gujarat with 1 million barrels each of Eagleford and Mars shale crude grades.

The energising of trade ties between the two countries has started happening after the US opened up export of crude oil and natural gas from its shores in 2016, 41 years after it was banned, following OPEC sanctions that pushed up prices. “Since the lifting of curbs on crude export, a number of countries have been exploring buying crude from the US. Last year, this was also helped by some short term (price) shocks which led to a spike in the Brent — WTI spread (differential),” says Aditya Gandhi, senior director, Sapient Global Markets.

For most of 2016 and the first half of 2017, the spread was in the range of $0-2 a barrel but it rose to $5-7 in the second quarter of 2017. Events, like shutdown of the Fortis pipeline system that brings crude oil from the North Sea to Europe, had a severe impact on Brent prices. US crude (indexed on WTI), however, was insulated from it. “This meant that in some cases, US crude price and shipping cost to India was cheaper than Brent indexed crude and its shipping. Because of this Indian import of US crude increased last year,” he says.

Indian state-owned refiners have contracted close to eight million barrels of US crude oil for an overall contract worth about $450 million. India imported on an average about 22,000 barrels per day of crude from the US, which was less than 1 per cent of its crude imports last year.

“This should grow with time but I do not expect a steep jump in these numbers. We will continue to see short-term opportunities where buying US crude will make sense, however, if the markets are efficient, I would expect that shipping this crude all the way from the US to India may not make economic sense on a regular basis leading to less number of long-term deals,” says Gandhi.

In the case of LNG, India could look at renegotiating pricing that is linked to the Henry Hub Index under long-term contracts with the American companies. A case in point is the Gorgon LNG deal where Petronet LNG, which has GAIL as a 12.5 per cent joint venture partner, renegotiated prices with Australian partner.

Unlike the LNG arrangement, US crude oil imports into India were done on cost and freight (C&F) basis where the importer takes care of the shipping arrangements. This coupled with reduced WTI-Brent spread gave India an advantage of around $2 in landed cost. In the case of LNG, however, the contract is on FOB (free-on-board) basis which means that the importer (GAIL) will make the shipping arrangement. Such an arrangement will give the company flexibility to swap gas based on the seasonal demand (time-swap) or regional. GAIL could sell gas in high seas to some other company closer to that company’s demand centre and take gas from it closer to India.

According to Barry Worthington, executive director, US Energy Association, transportation costs are an important variable but total offloaded price, fuel quality for both crude and natural gas, crude imports matching India’s refinery characteristics, security of supply, and potential stability are also the determinants.

US crude oil exports continue to expand and as additional LNG export capacity comes on line, American companies will benefit from the increased flexibility provided by competitive export options, he says.

While the American administration believes that US crude oil imports has the potential to increase bilateral trade by at least $2 billion, for India this means diversifying source geographies. And, this may not be at the cost of its imports from the West Asia that currently meets over 60 per cent of India's crude oil demand. “India needs access to stable, reliable, affordable crude oil and natural gas to improve access to electric power for industrial purposes, transportation, and for residential uses. The US can be a provider to India that meets these attributes. Enhanced trade between two countries typically improves other aspects of their relationship,” says Worthington.

For now, however, India’s trade relations with the US do not look to be improving, despite the energy trade picking up, due to the imposition of duties on steel and aluminium and a looming threat of increased duty on automobiles.