With falling prices, oilmin to redo PSU refiners’ crude buying model

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With the global crude oil price falling to 13-year low, the public sector oil refiners — IOC, BPCL, HPCL and MRPL — will overhaul their crude procurement process to cash in on the opportunity. The move is aimed to make the refiners more competitive like their private peers such as RIL and Essar Oil and take benefits of spontaneous buying of cargoes.

The Cabinet Committee on Economic Affairs is likely to take up the proposal shortly.

The petroleum ministry is working towards putting in place an ‘integrated trading desk’ model and do-away with the tendering mechanism of procurement. The new model, already practised by global firms and private Indian refiners, could help in buying crude oil cheaper by nearly $3-5/barrel. Given the existing capacities of PSU refiners, their combined savings could be $3 billion per annum.

“The ministry is working on it. The proposal would be soon sent for CCEA approval after inter-ministerial consultations are done,” a senior petroleum ministry official told FE.

The benchmark Brent has fallen 16.5% so far in January 2016 against 7.6% drop in January 2015 and 4% fall during the same period in 2014. On Wednesday, Brent crude was up 59 cents, or 1.87%, at $31.07 a barrel.

In the new mechanism, the public sector refiners would help to purchase crude oil through non-tender route, as the current process is longer and expensive. The integrated trading desk would be the platform to negotiate directly between the buyer and seller and also capture market opportunities such as buying distress cargoes.

The tender route approach for spot procurement currently adopted by PSUs restricts opportunities for quick decision making for buying and selling cargoes on perceived advantage. The trading desk approach involves traders continuously talking to market participants during the entire day. As and when opportunities arise, the traders can finalise deals without calling for tenders, said an official at a public sector refiner.

It is learnt that Malaysia-based Petronas has adopted this route for setting up their trading desk.

In May 2013, the Parliamentary Standing Committee also pointed out the need for better crude oil procurement mechanism. It said that PSU refiners should be given flexibility for carrying out negotiations including pricing, hiring ships and better terms on freight. In addition, the petroleum ministry should allow PSUs to procure certain percentage of their annual crude requirement through distress sale route, recommended the committee.

IOC, BPCL, HPCL and MRPL buy nearly 70-75% of their crude oil requirement via long-term deals, while remaining 25-30% is sourced from spot market, costing premium.

In the current mechanism, the PSU refiners would float the tender, receive offers, seek clarification, evaluate them and then approve the buying. This entire process takes time.

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