Mounting Geopolitical Risks Make Oil Storage Expansion Imperative for India
01.05.2024 By Tank Terminals - NEWS

January 5, 2024 [S&P Global]- India’s total petroleum storage capacity is much lower than the levels held by some member countries of the International Energy Agency, but rising geopolitical risks and an anticipated growth in refining capacity are prompting the country to accelerate efforts to expand storage in coming years, a parliamentary panel report and analysts said.

 

India’s vulnerability is apparent, especially in the face of recent disruptions, such as those witnessed in the Red Sea or heightened tensions in the Middle East. Any unforeseen situation along the supply route has the potential to jeopardize the energy security. This underscores the need for strategic measures and investments to enhance the country’s energy resilience and mitigate risks associated with external dependencies, they added.

“Considering the IEA standards requiring member countries to maintain oil stocks equivalent to no less than 90 days of net imports, India should aim to achieve and surpass this benchmark. This entails a comprehensive strategic plan for building and maintaining reserves to meet this critical threshold,” said Sumit Ritolia, refinery economics analyst at S&P Global Commodity Insights.

 

Addressing the shortfall

India’s strategic petroleum reserves, managed by Indian Strategic Petroleum Reserves Ltd. (ISPRL), currently have a capacity of 5.33 million mt, providing for about 9.5 days of total net oil imports. In addition, state oil companies hold storage facilities for crude oil and petroleum products for 64.5 days of total net imports. Hence, the current total national capacity for storage of crude oil and petroleum products stands at 74 days of total net imports, according to the parliamentary panel report.

On the other hand, IEA member countries are required to ensure oil stock levels equivalent to no less than 90 days of their net imports, it added.

“The Committee notes that the strategic storage will be a dynamic concept as the total demand of petroleum products like diesel, petrol and ATF and other fuels keeps on changing more on the higher side as the economy grows. Therefore, strategic storage capacity needs to be worked out with a future target in mind,” the panel report said.

In its first phase, India set up SPRs at three locations with a combined capacity of 5.33 million mt: 1.33 million mt at Visakhapatnam, 1.5 million mt at Mangalore and 2.5 million mt at Padur in Karnataka. All three facilities have been commissioned.

In the second phase, India has drawn up plans to augment storage capacity further by creating an additional 6.5 million mt of SPRs at two locations: 4 million mt at Chandikhol in Odisha and another 2.5 million mt at Padur. It plans to set up the second phase on a public-private partnership model. The second phase will add another 12 days of requirements.

“State oil marketing companies maintain crude inventories as per their processing requirement for particular coverage days. But with an increase in refining capacity, inventory level of crude oil will also increase,” the parliamentary panel report said.

 

Smaller storage facilities

“The Committee is of the view that the existing refinery projects and the recently commissioned refineries may be asked to set up strategic storage capacity with a smaller capacity, like two to three days at five to six locations which can bring up 15 to 20 days additional capacity in a definite time frame,” it added.

While standalone strategic storage caverns at different locations help in ensuring supplies during difficult times, smaller storage capacities near the existing refineries may give them a better sense of security, it said.

The parliamentary panel has therefore recommended that the petroleum ministry look at various options to increase the strategic storage capacity in the country with a future demand in 2040 and work progressively to achieve them.

“India is proactively addressing energy security risks, given its heavy reliance on imported oil. In a strategic move, the country is constructing emergency storage facilities within underground caverns to secure and store crude oil,” Ritolia of S&P Global said.

“This initiative serves as a crucial step to hedge against potential disruptions in the oil supply chain, ensuring a resilient response to unforeseen challenges and bolstering India’s energy security. However, there is room for improvement, given the existing disparities in storage capacity when compared to IEA member countries,” he added.

Encouraging private sector participation in building, managing, and storing crude in petroleum storage facilities can help expedite capacity expansion while bringing in expertise, investment, and efficiency and contributing to the timely realization of storage infrastructure projects, Ritolia of S&P Global said.

India in recent years has decided to further liberalize its strategic oil reserves policy by allowing the trade and leasing of some volumes to help manage price risk and generate revenue. The decision to allow ISPRL to trade 20% of the volumes would give the company flexibility to sell crude to domestic refiners while importing and refilling reserves when international prices are low.

“ISPRL can lease up to 30% of its crude reserves and trade up to 20% of crude oil capacity under Phase I of SPR. In the event of any emergency, the government will have the first right to take all the crude in the storages,” the panel said.

 

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