EU sanctions on Nayara, Russian oil may hit Reliance too
What's the story
The European Union (EU)'s sanctions on Nayara Energy are expected to deal a blow to the company, while the ban on fuels made from Russian oil presents a significant challenge for Reliance Industries Ltd (RIL). Both companies now face the risk of being excluded from the EU market. RIL and Nayara are India's leading fuel exporters. The move also adds uncertainty to Russian energy major Rosneft's reported plans to sell its 49% stake in Nayara.
Strategic dilemma
Reliance faces tough choice
Reliance, which has a long-term agreement to buy large quantities of crude oil from Rosneft, now faces a tough decision. The company must either give up discounted Russian oil or lose access to the lucrative European diesel market. Both options are likely to hurt its refining margins. On Friday, the EU announced its 18th sanctions package, lowering the price cap on Russian oil from $60 per barrel to $47.6 per barrel.
Operational challenges
Nayara slapped full-fledged sanctions
The EU has imposed "full-fledged sanctions" on Nayara Energy, including asset freezes and travel bans. International companies operating shadow fleet vessels and trading Russian crude oil are also targeted by these sanctions. An industry executive said that Nayara may find it difficult to access banking channels for various transactions due to its European exposure. The company might also lose technical support from European technology licensors critical to its refinery operations.
Export limitations
Nayara may find alternative arrangements
Nayara will be barred from exporting refined products to Europe, which could affect its operations. However, some industry executives believe that the EU may find it difficult to enforce this import ban as Indian refiners don't directly deal with European buyers and rely heavily on intermediary traders. Despite these challenges, Nayara may find alternative arrangements to avoid disruption in its operations.
Government stance
India opposes EU's sanctions on Nayara, RIL
The Indian government has opposed the sanctions, stressing that energy security is of utmost importance. "India does not subscribe to any unilateral sanction measures. We are a responsible actor and remain fully committed to our legal obligations," Ministry of External Affairs (MEA) spokesperson Randhir Jaiswal said on Friday. He added that the government considers providing energy security as a responsibility of paramount importance to meet its citizens' basic needs.
Price cap adjustment
EU introduces dynamic mechanism to modify oil price cap
The EU has also introduced "an automatic and dynamic" mechanism to modify the oil price cap to keep it below market levels. This move is expected to make Russian oil more attractive for countries like India, which have been major buyers of Russian crude, noted MK Surana, former chairman of Hindustan Petroleum. However, with the US not supporting these sanctions, enforcing the price cap could be a challenge for the EU.