Analysis: ADNOC’s strategic storage move seen as win-win deal for India, UAE

The recent move by the Abu Dhabi National Oil Company to give up its crude storage lease in South Korea and instead sign a deal with India signals a strategic step by the UAE producer to establish ground presence in one of Asia’s fastest-growing oil demand centers, as competition to grab a piece of that market intensifies.

The deal by New Delhi and the UAE covering storage of nearly 6 million barrels of crude in India’s underground storage will not only help the Middle Eastern company expand its sales in the South Asian nation, but also give Indian refiners quick access to cargoes which could potentially lower their costs, analysts said.

“I think ADNOC realizes that OECD-Asia is no longer the oil demand hub in the region. As a result, they are shifting their marketing strategy, especially towards India, where they can sell their middle distillate-rich crudes, such as Murban. Their storage capacity is also linked to these market tactics,” said Ehsan Ul-Haq, principal consultant at KBC Advanced Technologies.

ADNOC’s Murban crude, which has a gravity of 39.6 API and a sulfur content of 0.79%, is coveted for its high yield of light distillates such as naphtha and jet fuel/kerosene. The other ADNOC crude grades are Upper Zakum and Das Blend.

“The biggest advantage for Indian refiners is that if there is a quick need for cargoes by refiners, they can take it from part of the reserves earmarked for commercial purposes. And since ADNOC crude would be readily available within the country, it would work out to be an economical proposition, compared to what it would cost if they have to ship in those cargoes,” said a senior energy adviser with a leading oil firm. MUTUAL GAINS

India’s Cabinet in early March approved ties between Indian Strategic Petroleum Reserve Ltd. and ADNOC, under which ADNOC will store 5.86 million barrels of crude oil at underground facilities in Karnataka state. That facility can hold a total of 11 million barrels of oil.

Out of the crude stored, a part would be used for commercial purposes by ADNOC, while a major part would be purely for strategic purposes, according to Indian government officials.

“Firstly, this is a win-win deal. ADNOC through this deal has cemented its position, to some extent, in the Indian downstream segment, which is at a big take-off stage. It has set its footprints in the Indian sub-continent now through this deal,” said Sri Paravaikkarasu, Head of Oil, East of Suez, at Facts Global Energy.

ISPRL has set up around 39 million barrels of strategic crude oil storage at three locations — Padur and Mangalore on the west coast and Visakhapatnam on the east coast.

The UAE was the fifth-largest supplier of crude oil to India, sending 15.7 million mt (around 315,000 b/d) of crude to the country in the fiscal year 2015-16 (April-March), according to official data.

India imports nearly 80% of its crude oil needs, out of which about 8% is supplied by the UAE. In 2016, Indian crude imports rose 9.6% year on year to 215.43 million mt, provisional data from the country’s Petroleum Planning and Analysis Cell showed.

ADNOC’s decision to sign a storage deal in India came just as the Middle East company ended its contract with Korea National Oil Corp. for storing oil at the Yeosu facility in the country’s southwest coast.

ADNOC and KNOC signed a joint storage deal in 2013 under which the former stored 6 million barrels of crude oil at Yeosu. South Korea had first right over the oil in the event of a supply emergency.

South Korea’s joint storage agreement was part of a package deal with the UAE under which KNOC was to get stakes in upstream projects in Abu Dhabi.


South Korea’s oil and LNG demand are expected to slow down in 2017, after gains in 2016, owing to rising prices and sluggish economic growth. A policy paralysis amid the ongoing political crisis is expected to add to the woes.

The country’s state-run think tank, Korea Energy Economics Institute, said in a recent report that South Korea’s oil products demand is expected to grow at 2.2% this year, slowing from a 7.6% expansion seen in 2016.

In contrast, according to Platts Analytics, India’s oil demand growth will outpace China’s demand growth in 2017 for the third year in a row. While India’s demand is expected to grow at about 7% to 4.13 million b/d in 2017, China’s oil demand is seen growing by about 3% to 11.5 million b/d.

“Given the rapid pace of growth in Indian oil demand and the strategic advantages of locating in India in order to swing into other parts of Asia, holding stocks in the Indian SPR makes a lot of sense for the UAE,” said Amrita Sen, chief oil analyst at Energy Aspects.

Middle Eastern producers are not only competing amongst themselves to grab a bigger share of the Indian market, but they are also bracing for more competition from suppliers like Russia. The Mangalore facility was partially filled with Iranian crude and the recent deal would allow ADNOC to use the facility for its commercial use, Paravaikkarasu said.

“The revival in Indian demand is escalating its crude import dependency, which presents splendid opportunities for crude producers who are competing fiercely for market share,” she added. Abu Dhabi’s Murban crude often competes directly with Qatari condensate, as they are both coveted for their high yield of light distillates such as naphtha and jet fuel/kerosene.
Source: Platts