Shipping costs drive a change in strategy
Indian Oil Corporation has secured board approval to buy crude oil and liquefied petroleum gas carriers as disruptions around the Strait of Hormuz push spot freight charges to as much as $10 per barrel. The state owned refiner currently pays about $2 to $2.50 per barrel for crude transport on vessels secured through time charters, making access to shipping a major source of savings.
Contents
Director of Finance Anuj Jain said during the company's second quarter earnings call on October 31 that tenders for a few vessels had been issued several months earlier. The plans, described on November 8, 2026, also include examining whether ships could be built in India under the government's Make in India initiative.
Indian Oil, India's largest oil refiner, is considering three approaches together: improving its existing charter arrangements, owning vessels and supporting domestic shipbuilding. The company has three crude carriers and nine LPG carriers on time charter. LPG, or liquefied petroleum gas, is a fuel commonly used for cooking.
The immediate pressure comes from disruption to commercial shipping near Hormuz, alongside rising freight charges and war risk insurance costs. For a refiner, buying oil is only part of the job. It must also secure a ship, pay for the journey and arrange delivery in time to keep its plants running.
Jain, who oversees Indian Oil's finances, described shipping as an area requiring greater attention from the industry:
"The country needs oil sector companies to focus more on the shipping area now," Jain said.
How much more expensive is transport?
Indian Oil's figures show a large gap between the cost of its existing crude transport arrangements and prices in the spot market, where shipping is booked at prevailing rates for an immediate requirement. Compared with the company's charter costs of $2 to $2.50 per barrel, spot rates of $8 to $10 are roughly three to five times as high.
The difference is between $5.50 and $8 for each barrel transported, depending on which ends of the quoted ranges are compared. That is a substantial extra expense before the crude has even reached a refinery, where it is processed into petrol, diesel and other products.
LPG shipping has become more expensive too. Jain put normal freight at about $40 per tonne, against current spot rates of $160 to $180. Those figures represent an increase to four to four and a half times the normal level.
War risk insurance adds another cost. This is cover associated with operating in areas exposed to conflict. When insurers charge more for that risk, the expense of moving fuel can rise even without a change in the price of the fuel itself.
What owning vessels would change
Indian Oil's existing time charters secure vessels for an agreed period, giving it access to shipping capacity under contracts already in place. A voyage charter, another arrangement the company has used, books transport for a particular journey. Both allow a refiner to move cargo without buying the ship.
Purchasing carriers would give Indian Oil another way to organise deliveries and manage exposure to sudden freight increases. Ownership also brings the cost of buying, maintaining and operating vessels. The savings from existing charters explain why the company is examining several shipping options together.
Indian Oil had earlier explored acquiring four medium-range vessels through an arrangement involving Shipping Corporation of India and other state-run oil companies.
The company has described the planned purchases only as a few vessels. It has not specified their number, capacity, purchase price or delivery timetable, or announced a decision on building them in India. Board approval and the earlier tenders are the concrete steps disclosed so far.
A wider oil supply network, with Russia leading
Russia supplied 55 per cent of Indian Oil's crude requirements during the first half of the financial year, according to Jain, while the Middle East accounted for 24 per cent. On those figures, Russia's share was more than twice the Middle Eastern share.
Jain also cited contributions of about 10 per cent from Africa, 7 per cent from Brazil, 2 to 5 per cent from the United States and 3 to 4 per cent from Venezuela. The percentages quoted together exceed 100 per cent, and the company did not explain the basis for reconciling them. Russia and the Middle East were nevertheless identified as the two largest sources.
Jain said Russian crude's share remained range-bound in the second quarter. Indian Oil continued to purchase Russian crude at what he called "optimal prices" and had continuously bought and processed Venezuelan crude. Buying from several regions gives the company more choices when particular supplies or shipping routes become difficult or expensive.
Crude sourcing and shipping are closely connected. A lower purchase price can be partly offset by a higher delivery bill. Indian Oil's effort to secure vessels sits alongside its procurement decisions because the final cost depends on both the oil and its journey to India.
Spot purchases rise to 87 per cent
Spot imports accounted for about 87 per cent of Indian Oil's crude sourcing in the first half of FY27, compared with around 50 per cent in the previous financial year. That is an increase of approximately 37 percentage points, leaving a much larger share of procurement dependent on individual market purchases.
Spot buying allows a refiner to choose available cargoes and negotiate prices as market conditions change. It also means that a larger share of purchases is made at the terms available at that time. A spot purchase of oil and a spot booking for a ship are separate transactions, so crude bought this way can still travel on a vessel secured through an existing charter.
Jain said Indian Oil had negotiated discounts against benchmark crude prices despite market volatility. A benchmark is a reference price used to value oil, with a particular cargo priced above or below it according to its quality and trading terms.
During the September quarter, Indian Oil's purchase prices ranged from a discount of $5 per barrel to a premium of $12. In the preceding quarter, the range ran from no premium or discount to a premium of $18. The highest quoted premium therefore fell by $6 per barrel, while some purchases were made below the benchmark.
Higher prices and larger fuel buffers
Jain linked the rise in oil prices to US and Iranian hostilities escalating toward the end of February. The Indian crude basket, a measure of the prices of crude grades relevant to India's imports, averaged around $65 to $70 per barrel in February. It stayed above $100 for much of the first quarter and averaged about $120 in October.
The chronology described by the company traces the pressure on purchasing and transport through the year:
- Late February: US and Iranian hostilities escalated, according to Jain.
- First quarter of FY27: Indian basket crude remained above $100 per barrel for much of the period.
- First half of FY27: Spot purchases reached about 87 per cent of Indian Oil's crude sourcing.
- September quarter: Indian Oil recorded a profit and inventory gains.
- October: Indian basket crude averaged about $120 per barrel.
- October 31: Jain discussed the vessel purchase plans during the earnings call.
- November 8, 2026: Details of the vessel purchase plans became public.
Indian Oil said it maintained refinery operations at optimal levels despite the disruption. It increased crude inventories to about 39 days, compared with its usual 33 to 35 days. That gives it roughly four to six additional days of crude cover at the operating rate used for the calculation.
The company also held about 20 days of LPG inventory and 23 to 25 days of petrol and diesel stocks. Those reserves give the business time to manage delayed deliveries while continuing to supply customers. Larger inventories also require money to remain tied up in oil and fuel until they are processed or sold.
Profit rebounds, helped by inventory gains
Indian Oil reported net profit of ₹21,630 crore for the September quarter, compared with a loss of ₹2,661 crore in the preceding quarter and profit of ₹7,610 crore a year earlier. The latest profit was about 2.8 times the figure from the same quarter of the previous year.
The company attributed the improvement to inventory gains and better performance across several businesses. It recorded an inventory gain of ₹6,948 crore during the quarter. Such gains can arise when oil and products acquired at earlier prices become more valuable as market prices rise.
Indian Oil also reported a gross refining margin of $18.52 per barrel, excluding the impact of the special additional excise duty. A refining margin measures the difference between the value of products made from crude and the cost of that crude, before all the company's other expenses are taken into account.
Jain said geopolitical developments remained a major uncertainty because they affect procurement, freight and marketing margins, the earnings associated with selling fuel. Vessel ownership would address one part of that exposure. The company's broader response combines shipping arrangements, purchases from several regions and larger stocks to keep refineries and fuel supplies operating through disruption.
Key Points
- Indian Oil's board has approved purchases of a few crude and LPG carriers, with tenders issued months earlier.
- Crude transport on existing time charters costs about $2 to $2.50 per barrel, against spot rates of $8 to $10.
- LPG spot freight has risen to $160 to $180 per tonne, compared with a normal level of about $40.
- The company is also examining shipbuilding in India under Make in India.
- Crude inventories rose to about 39 days, from the usual 33 to 35 days.
- September quarter net profit reached ₹21,630 crore, supported partly by inventory gains of ₹6,948 crore.
