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Mon 16 Sep 2019 11:26 AM

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Saudi Aramco attacks pose threat to India's fiscal balance, say experts

India's import bill could get a 'crude' shock if the current production disruptions push the price of oil above $70 a barrel

Saudi Aramco attacks pose threat to India's fiscal balance, say experts

Production disruptions at Saudi Aramco’s oil facilities, following the weekend’s drone attacks, could have a major impact on India’s import bill and upset the country’s fiscal deficit in a big way, oil industry officials and experts have cautioned.

Saudi Aramco’s production output lost about 5.7 million barrels on Saturday after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khuraisbia.

Brent futures saw a spike of about $12 a barrel when trading started on Monday, which industry analysts described as the biggest ever jump in dollar terms.

“If the price surge is temporary and Saudi production is restored at the earliest, then the situation is not a big worry for India. But if the geo-political situation develops into a conflict or the production restoration takes time, then it could give a big jolt to India’s import bills, upsetting the country’s fiscal deficit in a big way,” Amit Kumar, oil industry analyst and Partner, PwC India, told Arabian Business.

“India has resilience for crude prices up to $70 per barrel as this price level is already factored in the country’s budget for this year. A surge in crude prices beyond $70/barrel will not only affect India’s fiscal maths but will have a cascading effect on domestic industry and inflation,” he added.

Long-term outlook

Oil industry officials said a price increase for a day or two may not impact India’s import prices as crude import contracts are determined as part of a long-term strategy.

Indian crude imports are based on a two week price average.

Officials at Indian Oil, a leading Indian importer, said they were still watching the situation before contingency plans are drawn up.

However, oil industry experts have said the long-term impact will depend on how much damage has been caused by the drone attacks and what exact facilities were impacted.

“After crude is extracted, it is brought to a facility for the stabilization process which separates gas and crude. While it is not clear where exactly the damage has been inflicted, if the damage is done at the stabilization plant of Saudi Aramco, then it could take a minimum of 1-2 months before the facility is restored,” Tsunduru Muralidhar, an oil industry expert, who worked with public and private sector oil companies in India, told Arabian Business.

Without the stabilization process, crude cannot be send for refining, Muralidhar, who was associated with designing of refineries earlier, added.

Following the attacks, Saudi Aramco said it is hopeful of restoring 20 percent of production by Monday evening.

Muralidhar said even if Saudi Arabia is to draw up crude from its storage facilities to ensure supplies for the time-being, crude prices will continue to surge as the market will react to the production disruptions.

“This development (sudden spurt in crude prices) is coming up at a time when the Indian economy is passing through a very difficult stage. Any sustained rise in crude prices could give a jolt to India’s import bill, and thereby adversely affect the fiscal situation,” Kalpana Jain, senior executive with Deloitte India, told Arabian Business.

Indian authorities are already said to be in touch with the Saudi authorities to ensure that India get primacy in supplies, she said, adding that the price situation will remain a concern.