State-owned Oil and Natural Gas Corporation (ONGC) has entered into an agreement to supply crude oil from its Mumbai offshore fields to Hindustan Petroleum Corporation Ltd (HPCL). This marks the second such deal in recent months, as ONGC prefers term contracts over auctions, which often lead to substantial discounts for refiners.
In a social media announcement on X (formerly Twitter), ONGC confirmed the signing of a “term agreement with HPCL for sale of crude oil from Mumbai offshore.” While specific details were not disclosed, insiders suggest that the agreement encompasses the sale of approximately 4.5 million tonnes per annum of crude oil to HPCL’s Mumbai refinery.
This development follows a similar pact signed last month, where ONGC committed to supplying 4 million tonnes per annum (with an optional 0.5 million tonnes) of crude oil to Bharat Petroleum Corporation Ltd (BPCL), which also operates a refinery in Mumbai.
ONGC’s production includes approximately 13-14 million tonnes per annum of crude oil from its fields located in the Arabian Sea off the Mumbai coast.
In June of the previous year, the Indian government eliminated a rule requiring oil from blocks awarded before 1999 to be sold to government-nominated customers, primarily state refiners. This change aimed to ensure that producers like ONGC and Oil India receive more favorable market prices for their crude oil.
Following the rule change, ONGC initiated quarterly auctions of crude oil produced from the Mumbai High and Panna/Mukta fields in the western offshore region. Initially, ONGC received a slight premium over Brent crude, which is the closest benchmark for its Mumbai offshore oil in terms of quality. However, refiners, including Indian Oil Corporation (IOC), began requesting discounts comparable to those they received for Russian oil.
The argument put forth by refiners like IOC was that they needed these discounts because they were selling petrol and diesel below cost to control inflation. ONGC resisted these demands, citing the government’s imposition of a windfall profit tax that negated the benefits of rising oil prices.
As a solution, ONGC proposed term contracts, wherein they would sell a fixed quantity of oil annually at a pre-agreed benchmark. The first such contract was signed with BPCL, and now, ONGC has solidified a deal with HPCL.
Insiders have indicated that both the BPCL and HPCL agreements are benchmarked to the traded price of Brent crude.
In the initial auction last year, ONGC offered 33 lots of 412,500 barrels each for sale, with most being sold to state refiners and one awarded to Reliance Industries Ltd. The premiums paid by refiners varied based on the origin of the crude, with Uran cargoes fetching lower premiums due to local taxes.
The pipelines from Mumbai offshore fields directly connect to the Mumbai refineries of BPCL and HPCL, making these deals strategically significant for both parties.
