HPCL leads Indian refiners' shift to delivered crude as freight swings

Indian state refiners are changing the delivery term on their crude purchases. Instead of fixing a cargo free on board (FOB) at the load port and chartering separately, they are taking delivered prices, with the seller arranging and paying for the voyage². CIF, or cost, insurance and freight, is the term the Platts report uses^2, 4.

"We are buying crude on a delivered basis these days and not on FOB as we used to buy earlier," a senior refinery official told Platts on October 26².

The delivery term decides who arranges and pays for freight and insurance, and who buys war-risk cover^2, 3.

HPCL leads, and BPCL is deciding cargo by cargo

Equirus Securities, in a note on HPCL's September-quarter results, said almost all of its cargoes are now bought on a delivered basis, against about half earlier¹. Chairman and managing director Vikas Kaushal told the company's October 23 investor call that HPCL was looking at buying crude on a landed basis, except where sending its own vessel was cheaper².

"It is now a volatile situation, on how the market is reacting," Kaushal said². HPCL no longer relies on a fixed 50-50 split between term and spot purchases, because the war had changed the economics of sourcing².

Bharat Petroleum is deciding cargo by cargo. Finance director V. R. Gupta told an investor call on October 26 that freight and insurance rates were still high, although crude supplies were ample². BPCL expected Russian cargoes to be significantly reduced for November because of higher freight⁵. By December it plans to buy more Russian crude again, despite the freight bill². Premiums for Russian crude for December cargoes narrowed to about $1 to $2 a barrel, from $12 to $13 a barrel in October⁵.

Indian Oil has not said it changed its terms. Its chairman, A. S. Sahney, said on October 27 that India needs its own ships and storage because "freight is eating that up"⁶. "Freight is a killing factor," he said⁶. The Platts report did not say whether Reliance Industries, Nayara Energy or MRPL have changed their terms².

What freight now adds to a barrel

Industry executives told The Economic Times that a tanker now charges $10 to $11 a barrel from the Gulf to Indian ports, against $1 to $1.5 before the war³.

The International Energy Agency put the Gulf to Asia cost at more than $37 a barrel by mid-October, more than five times the pre-war level^3, 7. On a very large crude carrier holding 2 million barrels, that is more than $74 million for one cargo, against less than $15 million before the conflict⁷.

Goldman Sachs put the global average crude freight rate above $20 a barrel, from $3 a year earlier⁸. It attributed $7 a barrel of the increase to the war-risk premium for crossing Hormuz⁸.

These are assessments, not invoices: the Gulf to India figures come from industry executives³, the global average from Goldman Sachs⁸, the Asia figure from the IEA⁷. None of the reports reviewed gave a Gulf war-risk rate as a percentage of hull value. War risk is separate cover, because ordinary hull insurance does not cover a vessel sailing into a war zone⁹.

The Petroleum Planning and Analysis Cell put April to September crude imports at $90.6 billion, up 46.3%, while volumes were almost flat¹⁰. The Indian basket averaged $121.25 a barrel in October against $65.08 a year earlier¹⁰.

Where the risk sits under FOB, CFR and CIF

Incoterms 2020 splits cost and risk differently⁴. Under FOB, the seller loads the cargo on the ship the buyer nominates, and the buyer pays freight, insurance and unloading⁴. Because the buyer is the charterer, demurrage, the charge for keeping a ship beyond its allowed laytime, is the buyer's exposure^4, 11.

Under CFR, the seller pays freight to the destination port, but risk passes when the cargo is loaded on board⁴. CIF adds insurance: the seller must cover the goods at the default level the rules set, unless the parties agree a higher one⁴. That default is Institute Cargo Clauses (C), the most restricted level of cargo cover, so wider cover must be agreed in the contract^4, 9. The seller must also hand over the shipping documents, including the bill of lading and the insurance policy. The buyer pays against those documents, not against the cargo's arrival⁴.

CIF therefore gives a buyer cost certainty, not delivery certainty. Risk passes at the load port even though the seller pays the voyage, so a lost cargo is claimed through the documents and the insurer⁴. The Platts report describes CIF as the seller covering the cost and risk of transport². In the Incoterms rulebook the two points sit in different places⁴.

A delivered price also hides the freight line, which mattered less at $1 to $1.5 a barrel than at $10 to $11³. Over four weeks to October 25, VLCC freight from Ras Tanura inside Hormuz to Ningbo averaged about $12 a barrel more than from Fujairah outside the strait¹². Loading inside Hormuz cost $20 to $30 a barrel more than at the lightering zone¹³. The reports reviewed did not compare Gulf producers' delivered offers with FOB plus benchmark freight, so any delivered premium is not established^2, 12.

The buyer checklist, and what would reverse the shift

A checklist for volatile-freight buying:

• Get FOB and delivered prices on the same cargo and delivery window, and compare landed cost².
• Ask for the freight line separately and check it against a published assessment. Baltic Exchange route assessments are used to set freight contract rates and settle freight derivatives¹⁴.
• Agree who buys war-risk cover, on what value, and how the premium resets⁹.
• Check the seller's tonnage. The market is short of vessels "willing and able to operate efficiently in the Middle East Gulf", according to Kpler's Matt Wright³. A point to weigh: a delivered seller without its own ships carries a new counterparty risk.

Global VLCC rates have dropped from recent highs, and the Atlantic to Asia basket fell 18% in the week of October 19, against 7% east of Suez¹². Hormuz transits held steady at 17 ships on October 25, including six VLCC movements². Sparta's Aaron Kildow said the best case is a peace agreement that includes Iran and the Houthi forces¹³.

Two things to watch. First, whether freight keeps easing while Gulf exports hold near pre-war levels, which would narrow the gap between FOB and delivered offers^12, 7. Second, Indian Oil's results on Friday, when it may say how much of its crude it now buys delivered¹. Whether delivered terms outlast the war depends on freight staying calm^2, 12.