The state-owned Oil and Natural Gas Corporation (ONGC) has entered into a significant agreement to supply crude oil from Mumbai offshore fields to Hindustan Petroleum Corporation Ltd (HPCL), marking the second such deal in recent months. This decision by India’s leading oil and gas producer signifies a shift towards term contracts, a preference over auctions that often result in deep discounts for refiners.
In a social media post, ONGC announced, “term agreement with HPCL for sale of crude oil from Mumbai offshore.” Although specific details were not disclosed, insiders familiar with the matter suggest the contract covers the sale of approximately 4.5 million tonnes of crude oil annually to HPCL’s Mumbai refinery.
ONGC highlighted that this marks the second term agreement executed for the sale of Mumbai Offshore crude oil following the freedom to market their products.
Just a month prior, ONGC had already sealed a similar pact to sell 4 million tonnes of crude oil annually, along with an optional 0.5 million tonnes, to Bharat Petroleum Corporation Ltd (BPCL), which also operates a refinery in Mumbai for the conversion of crude oil into various fuels, such as petrol and diesel.
ONGC, known for its substantial oil production, extracts between 13-14 million tonnes of crude oil annually from its offshore fields in the Arabian Sea, situated off the Mumbai coast.
In June of the previous year, the Indian government abolished a regulation stipulating that oil from blocks awarded before 1999 must be sold to government-nominated customers, primarily state-owned refineries. This prior rule had left producers like ONGC and Oil India receiving less than the best market price for their oil.
In response to the rule change, ONGC initiated quarterly auctions of the crude oil produced from the Mumbai High and Panna/Mukta fields situated in the western offshore region. Although ONGC initially received a slight premium over Brent, the global benchmark for crude oil, during these auctions, refiners like Indian Oil Corporation (IOC) began demanding discounts similar to those offered on Russian oil.
The demand for discounts was driven by the losses incurred by refiners who sold petrol and diesel below cost to manage inflation. ONGC, however, resisted these discounts, arguing that the government had already imposed a windfall profit tax, erasing any advantages derived from the recent surge in oil prices.
As a solution, ONGC proposed the concept of a term contract, which involves selling a fixed quantity of oil annually based on a pre-agreed benchmark. The company initially established such a contract with BPCL, and it has now concluded a similar deal with HPCL. Both agreements are reportedly benchmarked to the traded price of Brent crude.
In their initial auction last year, ONGC offered a total of 33 lots, with varying premiums for different cargoes, reflecting the differences in local taxes and transportation costs.
The move towards term contracts represents ONGC’s strategy to ensure more stability in its oil sales, effectively minimizing the impact of market fluctuations.
This approach allows them to engage in long-term partnerships with refineries like HPCL and BPCL while ensuring consistent revenue streams for the company.