India Makes Plans To Power Its Growth With Oil From From Latin America

Although they are separated by a continent, India and Mexico will soon be united in an energy embrace. This is because Latin America is fast becoming an important component of India’s energy plans. During his trip to Latin America recently, India’s Minister for Natural Gas & Petroleum Dharmendra Pradhan inked important energy agreements, collectively worth $5.6 billion in imports over a five-year period, with Mexico and Colombia.

The agreements serve multiple purposes. Primarily, they connect the third-largest consumer of crude oil in the world with some of its largest producers. (Mexico and Venezuela are the tenth-largest and 12th-largest producers of oil in the world). In addition, they help India ramp up its energy security as it enters a high-growth phase.

According to 2012 figures, India imported 71% of its total oil demand. In 2013, around 20% of that figure was imported from Saudi Arabia. Iran, which is constrained by sanctions from the West, accounted for 5.5% of the total crude imports in 2013.

But, there are two riders attached to those figures. First, the rise of ISIS and breakdown of Yemen has caused instability in the region. The Middle East is fast beginning to resemble a tinder box fraught with political uncertainty. Second, despite its proximity to the region, oil from the Middle East is an expensive deal for India.

Latin America offers benefits on both counts. The region is relatively stable politically. PIn addition, the heavy sour crude from countries such as Venezuela is cheap as compared to Brent or WTI crude. It is, also, perfect for India’s refining prowess. But the country’s imports from the region lag behind those of its closest competitor – China.

Based on customs data, China’s imports from Venezuela and Colombia in the first nine months of 2014 were 17.7 million tonnes, an increase of 18% from the same period in 2013. The country is also an active investor in the region doling out largesse in the form of infrastructure projects and investments in exchange for energy commitments. Correspondingly, India’s imports from the same region rose by only 9% during the same period and it is yet to make a significant mark in terms of investments.

The current agreements will help bridge the gap between India and China.

A diversified supplier base also augurs well for costs. As Western economies shift towards renewable sources of energy and producing their own oil, Asia has become an attractive market for oil producers. Major oil-producing countries have unrolled concessions and are engaged in fierce competition to become suppliers to this region. For example, the world’s largest oil producer, Saudi Arabia, slashed prices of its crude oil four times last year, in order to better compete in the Asian market. A diversified supplier base will help India negotiate better prices for its energy needs.