Govt plans to stop allocating local crude to oil refineries

New Delhi: The government is planning to abandon the current practice of allocating locally-produced crude oil to various refineries, which would help develop a free market for domestic crude, enable producers to realise better prices, and end some of the current supply logistics problems, according to people familiar with the matter.
The Cabinet is likely to shortly consider the oil ministry’s proposal for freeing up the sale of domestic crude oil. The proposal has come about after years of lobbying by producers, mainly from the private sector, which saw the state allocation of crude as an unnecessary control on producers.

At present, the government allocates all domestic crude to refineries based on their location, processing capability, and transport logistics at the beginning of the year. All state-run and private oil producers and refiners must stick to these allocated quantities.

Producers and refiners are, however, free to decide the oil price formula between them, which is usually related to international benchmarks and revised annually.

Producers often feel that the current practice strengthens refiners’ hands during price negotiation by assuring them the supply. At times, price negotiations have carried on for months as producers felt refiners were not offering them fair rates.

Producers are also barred from exporting crude oil, which further restricts the chance of fair price discovery. Vedanta, the country’s biggest private sector crude oil producer, has been seeking an end to export ban for years.

Another problem that allocation brought in is that of logistics. For example, part of the output from Vedanta’s Rajasthan block is allocated to a faraway refinery in southern India, which would require crude to travel long via pipeline and barges to reach the destination. With the proposed policy change, producers and refiners can avoid such expenses.

Domestic crude accounts for barely 15% of total consumption by the country. Refiners mostly depend on crude from the international market where prices are very dynamic.