State-owned Oil and Natural Gas Corporation (ONGC) has signed an agreement to sell crude oil it produces from Mumbai offshore fields to HPCL - the second such agreement in as many months, as India's top oil and gas producer prefers term contracts over auctions where refiners hammer deep discounts.

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In a post on X, formerly known as Twitter, ONGC said it has inked "term agreement with HPCL for sale of crude oil from Mumbai offshore."

While it did not give details, sources aware of the matter said the pact for sale of about 4.5 million tonnes per annum of crude oil to Hindustan Petroleum Corporation Ltd's (HPCL) Mumbai refinery.

"This is the second term agreement sealed for sale of Mumbai Offshore crude oil post marketing freedom," ONGC said.

Last month, ONGC had signed a similar pact to sell 4 million tonnes per annum plus an optional 0.5 million tonnes of crude oil to Bharat Petroleum Corporation Ltd (BPCL), which too has a refinery to convert the crude oil into fuels like petrol and diesel at Mumbai.

ONGC produces 13-14 million tonnes per annum of crude oil from its fields in the Arabian Sea, off the Mumbai coast.

In June last year, the government abolished a rule that said oil from blocks awarded prior to 1999 must be sold to government-nominated customers, mostly state refiners.

The old rule had led to producers such as ONGC and Oil India not getting the best market price.

Subsequent to that rule change, ONGC started quarterly auctions of crude oil produced from the Mumbai High and Panna/Mukta fields in the western offshore.

While the company got a slight premium over Brent - the crude oil its Mumbai offshore is closest in quality to - in the initial auction, refiners like Indian Oil Corporation (IOC) started seeking discounts equivalent to one they got on Russian oil, sources said.

Following Moscow's invasion of Ukraine in February last year, Russian oil was sanctioned and shunned by European buyers and some in Asia, such as Japan.

This led to Russian Urals crude being traded at a discount to Brent crude (the global benchmark).

The discount on Russian Urals grade was as high as USD 30 a barrel in the middle of last year and now around USD 16.

Sources said refiners like IOC argued that they needed discounts as they suffered losses on selling petrol and diesel at below cost to keep inflation in check.

ONGC resisted the discounts arguing that the government has taken away all upsides of the recent surge in oil prices through a levy of windfall profit tax.

And as a way out, it floated the idea of a term contract - selling a fixed quantity of oil in a year at the pre-agreed benchmark.

It first signed up BPCL for the term contract and now it has inked a pact with HPCL.

Sources said the pact with BPCL and HPCL are benchmarked to traded price of Brent.

In the first auction last year, ONGC had offered 33 lots of 412,500 barrels each - 26 cargoes from Uran near Mumbai and seven cargoes from Mumbai offshore - for sale starting November 1, 2022, at a minimum USD 0.5 premium over the average monthly price of Brent.

All the cargoes were sold to state refiners except one, which was awarded to Reliance Industries Ltd, sources said adding the refiners bid to pay a premium of USD 1.80-1.85 per barrel for cargoes from Uran, where supplies come through a pipeline, USD 3.8-6.5 per barrel for offshore cargoes and about USD 1.55 per barrel for a parcel from the Panna-Mukta field.

Uran cargoes fetch a lower premium as local taxes make the crude costlier than offshore supplies.

Pipelines from fields in Mumbai offshore directly connect to BPCL and HPCL's Mumbai refineries.