March 21, 2022 [THE INDU Business Line] – It’s woefully inadequate now. Building reserves is vital for protecting the country against oil price shocks
India is missing the bus, yet again. Today, everyone is talking about oil shock and the impact of expensive oil on economies. However, some economies have lightened the burden of volatile oil and gas prices by adjusting the supply — either through strategic petroleum reserves or domestic production.
But, in the case of India, neither has it built enough strategic reserve capacity nor is its domestic production sufficient enough to meet its demand. India is heavily dependent on imports for crude oil and almost 50 per cent of its gas requirement is met through imports.
India imports crude oil from various geographical regions such as West Asia, Africa, Europe, North America, South America and South-East Asia. The import dependency (per cent) of crude oil is based on consumption of petroleum products during the year. For example, during April-December 2021, the import dependence was almost 85 per cent. As regards gas, the demand is directly linked to supply.
To protect themselves from the impact of oil price shocks caused by Russia-Ukraine-like crises, countries dip into their strategic reserves to maintain supply and stabilise prices. For a consumer like India, it would have made immense sense to create such capacities not only for crude oil but gas also.
Strategic reserves programme
Before going further, one should know where India’s strategic reserves programme stands. While storage of natural gas is presently not being done, Indian Strategic Petroleum Reserve Ltd (ISPRL), a government of India company, has established crude oil storage facilities with total capacity of 5.33 million tonne (mt) at three locations — Vishakhapatnam (1.33 mt); Mangaluru (1.5 mt) and Padur (2.5 mt) — under Phase I of Strategic Petroleum Reserves (SPR) programme.
Further, the government has already approved establishing Phase II of the SPR programme with total storage capacity of 6.5 mt — at Chandikhol (4 mt) and Padur (2.5 mt) — to be executed through public-private partnership.
But Phase II has not really moved forward. The reason has been delay in getting land to build the capacities, which the State governments have to help with. Despite all approvals in place and ₹210 crore allocated in Budget 2020-21 for land acquisition, the project is stuck and RFP (request for proposal) for building these storage facilities is yet to be released.
Hurdles like this also result in India not being able to protect itself from oil shocks given that the existing capacity is hardly enough to meet its demands. Creating new capacity requires at least six years.
Now, if this was not enough, , in a bid to stabilise global oil prices, the government, in November 2021, agreed to release 5 million barrels of crude oil from its Strategic Petroleum Reserves at the behest of the US and in consultation with other major global energy consumers including Japan.
As per the consumption pattern of 2019-20, the total capacity in the established Strategic Petroleum Reserves facilities, with total capacity of 5.33 mt (about 39 million barrels), is estimated to provide for about 9.5 days of crude oil requirement. India has already dipped into the reserves.
Refilling of Strategic Petroleum Reserves is undertaken keeping in mind a host of factors, including the grade of crude, international market conditions and, of course, the price. Today, the price volatility in the oil and gas market makes refilling difficult.
In addition to the strategic reserves, oil marketing companies (OMCs) have storage facilities that can hold crude oil and petroleum products for 64.5 days. Had the Phase II capacity progressed quickly, it could have provided for another 12 days of India’s crude oil requirement.
Taking advantage of low crude oil prices in April-May 2020, the reserves from Phase 1 were filled to capacity that led to notional savings of about ₹5,000 crore, according to information available.
Bilateral dialogues
India has been taking up the issue of price volatility, bilaterally, with crude oil producing countries, with OPEC and others, and its strong preference for responsible and reasonable pricing for consumer countries.
Since the past few years, joint negotiations are being held by the Ministry of Petroleum and Natural Gas and oil PSUs with national oil companies of West Asia for favourable term contracts like inclusion of optional quantities in term contracts, enhancement of credit limit to oil PSUs in crude oil import, etc.
India strongly believes that the pricing of liquid hydrocarbons should be reasonable and determined by market forces. It has repeatedly expressed concern at supply of oil being artificially adjusted below demand levels by oil-producing countries, leading to rising prices and negative attendant consequences. But this was not enough.
What India can do now is to push ahead in building the reserves. It should not wait for Phase II to end before moving to the next phases. Besides, it should also focus on creating gas reserves for which the drying or dried-up wells/fields of ONGC and others can be used. In fact, such a suggestion was also made at a high level meeting of the Energy Transition Advisory Committee formed by the Ministry of Petroleum and Natural Gas and headed by Tarun Kapoor, former Secretary of the Petroleum Ministry.
Time is slipping by and given the unpredictability in the fossil fuel — oil and gas — market, India needs to go all out in creating strategic reserves.
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