New Delhi: A major strategic success has been achieved for the country’s largest private sector company Reliance Industries Limited (RIL). The US has issued a general license to the Mukesh Ambani-led company to buy crude oil directly from Venezuela. The move could prove to be a game-changer for Reliance’s Jamnagar refinery, as it will give the company direct access to cheaper crude and improve its gross refining margins.
No middlemen, direct deal
According to senior sources, Reliance got this approval at the end of January. Till now, due to US sanctions, Reliance and other Indian refiners had to buy Venezuelan oil through traders (middlemen). For example, this year Reliance bought 2 million barrels of oil through Vitol.
But after the new license, Reliance will now be able to buy oil directly from the entity that has extracted the oil. This will not only eliminate the commission of middlemen but will also stabilize the supply chain. After detaining Venezuelan President Nicolas Maduro, the US has eased the sanctions on the energy industry there, opening this path.
Why is Venezuelan oil special for Jamnagar Refinery?
Reliance’s Jamnagar Refinery is the world’s largest single-site refining complex and is one of the most complex refineries in the world.
- Advantages of heavy crude: Venezuelan crude (particularly from the Orinoco Belt) is classified as ‘heavy’ and ‘extra-heavy’. Jamnagar Refinery is specifically designed to process such sour and heavy crudes.
- Margin Increase: Due to production challenges, this heavy crude is sold at a huge discount to international benchmarks. Reliance can optimize its refining margins by converting this cheap oil into higher value products like diesel, kerosene and LPG.
- Petrochemical Integration: Reliance’s business model is based on integration of refining and petrochemicals. Heavy crude has higher residual content, which can be broken down into petrochemical feedstock, which will also improve margins for polymers and specialty chemicals.
- Geopolitical changes: This development is part of a larger geopolitical shift away from Russia towards the US and Venezuela. According to sources, India is diversifying its crude sourcing, and a decline in imports from Russia is considered certain.
US President Donald Trump recently said that Prime Minister Narendra Modi has agreed to stop buying oil from Russia and buy more oil from the US and possibly Venezuela. In return for this agreement, the US has removed the 25% punitive duty imposed on Indian goods due to Russian oil imports.
Government oil companies also in the race
Apart from Reliance, government oil companies are also taking advantage of this opportunity. Indian Oil Corporation and Hindustan Petroleum have jointly purchased 2 million barrels of Venezuelan crude. Of this, 15 lakh barrels are for IOC’s Paradip Refinery and five lakh barrels are for HPCL’s Visakhapatnam unit. Both Reliance and IOC were regular buyers from Venezuela before the sanctions.
This license received by Reliance is a positive sign for the Indian refining sector. The return of cheap Venezuelan crude will not only reduce Reliance’s input costs, but will also help Indian companies reduce dependence on Russian oil and balance US trade relations. Now the market will be keeping an eye on how this crude impacts Reliance’s financial results in the coming quarters.
