Indian refiners can replace Russian crude, but economic costs loom large: Reports

New Delhi: Indian refiners, the world’s largest buyers of Russian crude, could technically shift away from Moscow’s supplies, but doing so would carry significant economic and strategic costs, analysts have warned.

According to global data and analytics firm Kpler, Russian crude supports high distillate yields -- producing more petrol, diesel, and jet fuel – which are vital for India’s refinery operations. Replacing Russian oil, which currently makes up as much as 38% of India’s refinery intake, would lead to lower middle distillate output and higher residue, impacting efficiency and profitability.

"Indian refiners can operate without Russian crude from a technical standpoint, but the shift would involve major economic and strategic trade-offs," Kpler said in its report titled ‘US Tariffs on Indian Imports: Implications for Energy Markets & Trade Flows’.

US tariffs on India

The pressure comes as the United States imposes steep new tariffs on Indian goods. Last week, President Donald Trump announced an additional 25% tariff on US imports from India -- pushing total duties to 50% -- in response to India’s continued purchase of Russian oil.

The tariffs are likely to impact $27 billion worth of Indian exports to the US, sparking domestic discussions about whether New Delhi should reduce or stop oil imports from Russia.

Oil imports from Russia

India began ramping up Russian oil imports after Western sanctions on Moscow following its invasion of Ukraine in February 2022. Russian oil’s share in India’s total imports surged from just 1.7% in FY20 to 35.1% in FY25, making Russia India’s largest oil supplier. In FY25, India imported 88 million tonnes of crude from Russia out of a total 245 million tonnes.

In July alone, India received 1.6 million barrels per day (bpd) of Russian crude -- more than China’s 1 million bpd and Turkey’s 500,000 bpd.

Kpler attributes the jump in Russian imports to “deep discounts and strong compatibility with India’s refining systems,” particularly the Russian Ural crude.

"Russian crude supports high distillate yields (diesel and jet fuel) and is ideally suited to India's advanced refining infrastructure. It has enabled both state-owned and private refiners to operate above nameplate capacity while maintaining strong margins," the report said.

"A reversal of this will result in a mild yield shift (lower middle distillate yields, higher residue yields) and probably a small reduction in primary throughput rates, as margins will no longer command a sizeable premium against regional benchmarks, considering existing discounts on Russian oil," Kpler added.

India has responded diplomatically to the US tariffs while reiterating the importance of its energy security. Analysts warn that losing access to Russian crude could cost India an additional $3-5 billion annually, assuming a $5-per-barrel premium on 1.8 million bpd of crude. If global oil prices rise in response to reduced Russian exports, the financial impact could be even greater.

To offset these costs, the government might cap retail fuel prices, which could strain public finances. Limited storage capacity further complicates India’s ability to manage such a disruption.

Geopolitical tensions

Despite the continued flow of Russian oil under a "business-as-usual" approach, the rising geopolitical tensions have revived conversations about diversifying supply. Some Indian refiners are reportedly boosting their orders of Middle Eastern crude.

Replacing the 1.8 million bpd of Russian oil would require sourcing from multiple regions. "A balanced replacement strategy may involve 60-70 per cent of substitute volumes from the Middle East, with US and African/LatAm crudes serving as tactical fillers. Nevertheless, none match Russian barrels in cost, quality, or reliability (some of the Russia-to-India barrels have already been contracted under term agreements)," Kpler said.

While US WTI Midland crude could contribute 200,000-400,000 bpd, it is lighter and yields less diesel -- a drawback for India’s distillate-heavy demand. Freight costs and distance would also limit large-scale purchases. West African and Latin American crude offer limited potential as well.

"Replacing 1.7-2.0 million bpd of discounted, medium-sour crude would erode refining margins and misalign product yields. Lighter substitutes like WTI or West African grades produce more gasoline and naphtha, reducing diesel output and hurting both domestic and export economics," Kpler said.

Even Middle Eastern grades, which are more similar in quality to Russian crude, are closely tied to official selling prices (OSP), leaving little room for arbitrage.

"In addition to higher feedstock costs, Indian refiners would face elevated freight and credit charges," Kpler concluded. "The transition is commercially painful, even if technically feasible."