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Potential Surge in Oil Import Costs

New Delhi: Analysts predict that India's yearly oil import expenses could increase by USD 9-11 billion if the nation is forced to reduce its reliance on Russian crude due to US threats of additional tariffs or penalties on Indian exports.

As the third-largest consumer and importer of oil globally, India has benefited significantly from replacing market-priced oil with discounted Russian crude, especially after Western sanctions were imposed on Moscow following its invasion of Ukraine in February 2022.

Before the conflict, Russian oil constituted less than 0.2% of India's imports, but it now represents 35-40% of the country's crude supply. This shift has helped lower overall energy import costs, stabilize retail fuel prices, and mitigate inflation.

The influx of cheaper Russian crude has also allowed India to refine and export petroleum products, including to nations that have banned direct imports from Russia. This strategy has led to record profits for Indian oil companies.

However, this advantageous position is now at risk following US President Donald Trump's announcement of a 25% tariff on Indian goods and an unspecified penalty for purchasing Russian oil and weapons. While the tariff has been officially communicated, the details of the penalty remain unclear.

This situation coincides with the European Union's recent ban on imports of refined products derived from Russian crude, creating a challenging scenario for Indian refiners.

Sumit Ritolia, Lead Research Analyst at Kpler, described this as 'a squeeze from both ends.'

The EU sanctions, set to take effect in January 2026, may compel Indian refiners to limit their crude intake, while the US tariff threat raises the risk of secondary sanctions that could directly impact shipping, insurance, and financing for India's Russian oil trade.

'These measures significantly restrict India's crude procurement options, increase compliance risks, and introduce considerable cost uncertainties,' he noted.

Last fiscal year, India spent over USD 137 billion on crude oil imports, which are refined into fuels like petrol and diesel.

For refiners such as Reliance Industries Ltd and Nayara Energy, which together account for more than 50% of India's Russian crude imports, the situation is particularly challenging.

Nayara, backed by Russian oil giant Rosneft and recently sanctioned by the EU, and Reliance, a major fuel exporter to Europe, are both facing pressure.

As one of the largest diesel exporters globally, Reliance has utilized discounted Russian crude to enhance refining margins over the past two years, according to Kpler.

'The new strict origin-tracking requirements now force Reliance to either reduce its intake of Russian crude, potentially impacting cost competitiveness, or redirect Russian-linked products to non-EU markets,' Ritolia explained.

Nevertheless, Reliance's dual-refinery structure—comprising a domestic-focused unit and an export-oriented complex—provides strategic flexibility. It can allocate non-Russian crude to its export refinery while processing Russian barrels domestically for other markets.

While it is operationally feasible to redirect diesel exports to Southeast Asia, Africa, or Latin America, such a transition would likely result in narrower margins, longer shipping times, and increased demand variability, making it less commercially viable.

Kpler's data indicates a significant drop in India's Russian crude imports in July (1.8 million bpd compared to 2.1 million bpd in June), attributed to seasonal refinery maintenance and lower demand due to the monsoon. This decline is more pronounced among state-run refiners, likely reflecting heightened compliance concerns amid escalating geopolitical risks.

Private refiners, which account for over 50% of Russian crude imports, have also begun to reduce their exposure, with new procurement diversification efforts underway this week as fears of US sanctions grow.

Ritolia emphasized that replacing Russian crude is not a straightforward process. The Middle East is a logical alternative, but it presents challenges such as contractual obligations, pricing inflexibility, and a mismatch in crude quality that affects product yield and refinery configurations.

'The risk extends beyond supply to profitability. Refiners will encounter higher feedstock costs, and for complex units optimized for (Russian) Urals-like blends, margins will also be under pressure,' he stated.

Looking ahead, Kpler anticipates that India's complex private refiners, supported by strong trading divisions and adaptable configurations, will gradually shift towards non-Russian barrels from the Middle East, West Africa, Latin America, or even the US, where economically viable.

This transition, while operationally possible, will be gradual and strategically aligned with changing regulatory frameworks, contract structures, and margin dynamics.

However, fully replacing Russian barrels is a daunting task—logistically challenging, economically burdensome, and geopolitically sensitive. While supply substitution may seem feasible on paper, it remains complicated in practice.

'The financial implications are substantial. If India loses a USD 5 per barrel discount across 1.8 million bpd, the import bill could increase by USD 9-11 billion annually. Should global prices rise further due to reduced Russian availability, costs could escalate even more,' the report concluded.

This situation could heighten fiscal pressures, especially if the government intervenes to stabilize retail fuel prices. The ripple effects on inflation, currency, and monetary policy would be significant.

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