Russian Discount Oil: A Missed Opportunity for Us

Titu Datta Gupta & Shamsuddin Illius | 07 August 2022
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India can be one of our options in this tough time of high price of fossil fuels

The sanctions imposed on Russia by the US and its European allies since the Ukraine war have disrupted global supply chains of fuel oil and gas, sending prices sky high. While most of the countries are scrambling to secure their fuel supplies, the crisis has opened new avenues for brisk business for a few.

As the sanctions reduced its market in the West since the Ukraine war, Russia is offering discounts on its fuel oil shipments. China, India, and even the world's second largest oil producer Saudi Arabia are making the best use of the offer; they are buying cheaper Russian oils to meet domestic demand as well as export to Europe at much higher prices after refining.

Russia had offered to sell fuel oils to Bangladesh too. But Bangladesh could not avail of the offer. It was more of a technical failure than a diplomatic issue that we missed out on a great opportunity to ensure supply of fuel oil to meet our demand in this tough time.

The Russian oil bonanza

Russia has already overtaken Saudi Arabia to become China's top oil supplier. China's imports of Russian oil rose by 55% in May from a year earlier. The country spent $18.9 billion on Russian oil, gas and coal in the three months to the end of May – almost double the amount a year earlier, says a Bloomberg report. India shelled out $5.1 billion in the same period, more than five times the value from a year ago.

Saudi Arabia is also taking advantage of the oil bonanza, snapping up discounted Russian oil and serving fuel-hungry Europe. The world's largest oil exporter more than doubled its imports of Russian fuel in the April-June period to run its own power plants and free up its own crude for exports mainly to Europe, a Reuters report said earlier this month.

India's insatiable appetite for discounted Russian oil is eroding the dominance of traditional suppliers from the Middle East to Africa and the US in one of the world's most lucrative markets.

The share of the Eurasian region, which includes Russia, in India's overall crude oil imports reached a record 18.8% during April-June from 3.4% in the preceding 12 months, Bloomberg reported last month, quoting India's oil ministry data.

Why Russian crude oil offer caught BPC off-guard

How could Bangladesh benefit from these developments in the global petroleum oil market?

Was discounted Russian oil a viable alternative for us?

Or, can importing Russian oil refined in India at a discounted rate still be more beneficial for Bangladesh?

In a bid to diversify its oil export market amid Western sanctions that squeezed its oil trade since the Ukraine war began in February this year, Russia had wanted Bangladesh to buy its crude oil.

The world's third largest oil producer submitted a proposal to Bangladesh, State Minister of Power, Energy and Mineral Resources Nasrul Hamid said on 23 May.

"The Bangladesh Petroleum Corporation (BPC) is now exploring how it can import the oil and pay the bills," he had said.

Though mode of payment was a problem, it was the technical incapacity that stood in the way. Bangladesh's lone refinery facility could not raise its capacity in 54 years since it was built before independence.

The annual capacity of the state-owned Eastern Refinery Limited (ERL), built in 1968, is around 15 lakh tonnes, whose supplies have already been booked from Saudi Aramco and the United Arab Emirates for the entire 2022, a source earlier told The Business Standard.

Moreover, it has no capacity to refine Russian crude oil. The ERL usually refines the crude oil brought from the Middle East.

Bangladesh has no other refinery in the private sector that can refine Russian crude oil.

Engineer Md Lokman, managing director of ERL, told TBS, "Russian crude oil has a much higher density than the Middle Eastern crude oil. So, the ERL is not technically capable of using Russian crude oil, which will not match technically.

"If we use Russian crude, some features will not match and we will not get the maximum output," the MD said.

In 2010, the government decided to build a second unit of the ERL to raise its refining capacity to 3 million tonnes annually to meet local demand. However, its proposal has been amended at least 10 times and the construction works are yet to start.

Engineer Lokman said the under-construction ERL-2 will have some capacity to refine Russian oil. However, it is uncertain when the project will be completed.

Energy expert Dr Mohammad Tamim has also said Bangladesh's facilities are designed for Arab light crude imported from the Middle East and are not suitable for processing Russian crude.

Even if we manage to refine Russian crude here, its operation cost might grow much higher which might not be viable for us despite the discount offered by Russia, Dr Tamim viewed.

Usually, we do not import much crude oil – only around 13 lakh tonnes – while our annual imports of diesel and furnace oils amount to roughly 50 lakh and 40 lakh tonnes, respectively.

Russia exports mainly crude oil, while the majority of Bangladesh's need is refined petroleum products.

Apart from the limitation of domestic refinery facilities, distance also matters – as shipments from far away Russian ports will cost much more than those from the Middle East, Bangladesh's traditional source of fuel oils, Dr Tamim, who is also a professor at the Department of Petroleum and Mineral Resources Engineering of Buet, points out.

Indian refineries are geared for processing Russian crude as India has been a buyer of Russian oil for long, which made up around 6% of its total oil imports, he compares, explaining how India is benefiting from discounted Russian oil and refining it at home to export at higher price.

What about trying for Russian oil refined in India?

Prof Tamim thinks India could be a viable option for Bangladesh to get the cheaper Russian oil.

Here is how he explains.

"India is bringing Russian crude and exporting it refined to Europe. We can bring refined products – diesel or furnace oil – from India and ask for discounts because they are getting crude on discount and making good profit by selling it to Europe at high prices."

He suggests that special arrangements could be made to import refined oil products from India as he believes India can be one of our options in this tough time of high price of fossil fuels.

Back in May, Foreign Minister AK Abdul Momen had said he sought suggestions from India on how it is managing the purchase of oil from Russia.

"Russia offered us energy and wheat. We sought their [India's] suggestions on how they are doing it. This was more of a friendly discussion," he had said in India's Assam state where he joined his Indian counterpart S Jaishankar in a conference.

Nothing has been heard so far of the outcome of that "friendly discussion" as no visible move is seen regarding import of Russian oil refined in India.

Could opting for cheaper Russian oil, either directly or via India, be a reason for any potential political or diplomatic repercussions? Could it strain relationships with long-term suppliers Saudi Arabia and the United Arab Emirates?

Prof Tamim does not think so.

"Not much likely in the current situation," he says. "Given the severity of the crisis, every country now understands the ground reality," he thinks.

"You see, Europe has not stopped importing Russian gas. It has kept its pipeline open. Rather, Russia has reduced supplies to the pipeline," he said, mentioning how the West has kept exceptions to avoid their own difficulties and kept doors open to secure supply of products they need most despite sanctioning Russia.

"If Russian crude oil were beneficial for us, we could have opted for it. No matter what the US or others think. We have to tackle the situation diplomatically.

"Since we won't be able to benefit much from importing Russian crude oil, then what is the point of getting into any diplomatic or political issues unnecessarily?" the professor of petroleum engineering said, explaining why Bangladesh should rather opt for buying Russian oils refined in India at discounted rates.

Titu Datta Gupta & Shamsuddin Illius are journalist. 

This article was originally published on TBS.  
Views in this article are author’s own and do not necessarily reflect CGS policy.