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India eyes more equity oil from overseas in strategic energy security push

Highlights

Cabinet approves $1.6 billion investment to develop oil block in Brazil

New Delhi open to equity oil opportunities in other Latin American countries

India's aging fields struggling to keep output steady: Platts Analytics

India is looking to invest more funds in overseas oil projects through its state-run refiners, a move that would help offset the impact of slow production rate from aging fields at home and reduce the overall dependence on imported feedstocks, government sources and analysts told S&P Global Commodity Insights.

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The recent announcement by India to invest $1.6 billion in a project in Brazil for equity oil highlights the strategic interest of New Delhi to look for pockets of opportunities overseas, with analysts saying New Delhi is keen to explore such opportunities in other Latin American countries as well.

"Besides expanding strategic petroleum reserves and diversifying its crude supply sources, the government is making effort to bring oil from overseas equity assets in the event of a supply disruption," said Lim Jit Yang, advisor for Asia-Pacific oil markets at Platts Analytics.

"Supply security is becoming more important as global spare capacity has been uncomfortably low. In addition, India's ageing oil wells are struggling to keep their domestic oil production steady amid growing oil demand," he added.

Prime Minister Narendra Modi's cabinet in late-July approved a proposal to invest $1.6 billion to develop an oil block in Brazil in an attempt to procure equity oil overseas. The investment will be through Bharat PetroResources Ltd. or BPRL, which holds 40 percent stake in the BM-SEAL-11 project, while the remainder is held by Brazil's state-run Petrobras, the operator of the block.

BPRL is the exploration arm of state-run Bharat Petroleum Corp. In 2008, BPRL had bought a stake in the Brazil project. The Brazilian oil block is expected to go on stream from 2026-27, the oil ministry said.

Exploring various options

The latest approval to invest in Brazil will help diversify India's crude oil supply sources in the medium term as the country sources nearly 85% of its oil demand via imports, analysts said.

"This will help in accessing equity oil to strengthen India's energy security and diversifying India's crude oil supply and Indian oil companies have expressed interest in sourcing more crude oil from Brazil," a government statement said.

In addition, strengthening India's foothold in Brazil will further open business avenues in neighboring Latin American countries, it added.

India, the world's third-largest crude importer and consumer, sources 65% of its crude requirements from the Middle East. India has been stepping up cheap Russian oil purchases in recent months despite sanctions from the West to oil trade with Russia after the conflict in Ukraine.

The move to deepen energy relations with Brazil comes shortly after India made its intentions clear to explore opportunities for term crude deals with Brazil.

Brazilian energy minister Bento Albuquerque in April held discussions with Indian petroleum minister Hardeep Singh Puri to explore the possibility of long-term crude oil contracts among other energy cooperation opportunities.

However, analysts said high shipment costs, long sailing period and limited bandwidth with the South American producer to commit plentiful volumes beyond its traditional Asian customers will keep the size of any new term deals relatively small.

Regional traders said the bulk of Brazilian crude barrels coming to Asia mainly head to China and may not leave a lot of room for the South American supplier to commit a lot of crude for India.

In addition, while it currently costs less than $4/mt and takes about four to six days to ship crude oil from the Middle East, it costs $15-$20/mt and takes more than 25 days to ship from Brazil to Asian destinations, market sources said.

Production constraints

India's diversified conglomerate and largest private upstream producer Vedanta recently reported a 10% on the year drop in production at 148,000 barrels of oil equivalent/day in the April-June quarter, the company said late-last month, due to a fall in output at its oil fields in the western state of Rajasthan.

The production drop was due to natural decline largely offset by infill wells and gas production, it said.

"Cairn is operating in producing fields that have a natural decline like all oil and gas Assets. However, through enhanced recovery, exploration and shale operations in partnership with global technology partners, we remain confident of increasing production to 300,000 boe/d in the short to medium term," the company said.

Vedanta contributes a fourth in oil and gas production of India, while state-run ONGC accounts for the bulk of the country's oil and gas output.

"Lower production has been a perennial problem for the last five years," said a Mumbai-based oil analyst.

Vedanta has plans to spend around $4 billion over the next three years to more than triple its production, as high global crude and gas prices make investments attractive. It also plans to drill more wells to explore new oil and gas reserves across its 51 blocks in the country, company officials said.