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Why scaling up of Strategic Petroleum Reserves (SPR) is a good strategy for India

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Two seemingly routine yet strategically very important announcements came from the Govt in the last fortnight. First, in his budget speech in parliament Finance Minister Arun Jaitley proposed setting up of two additional  Strategic Petroleum Reserves [1] namely Chandikhol in Orissa and Bikaner in Rajasthan, which would augment India’s crude oil storage capacity from current 5 million metric tons (MMT) to 15 MMT and second, India- UAE agreement following the state visit of Prime Minister Modi to Gulf nations [2] in which Abu Dhabi National Oil Company (ADNOC) agreed to invest $400 million by way of storing about 6 million barrels of oil at India’s Strategic Petroleum Reserve (SPR) facility at Mangalore, taking up about half of the site’s capacity of 1.5 MMT.

At the root of both these important announcements is India’s keen desire to quickly scale up its much-delayed strategic crude oil storage capacity to not only secure its energy supplies but also to match its eastern adversary China, who has rapidly moved forward on this path in last decade and built some massive storage capacities next only to USA and worst still is now increasingly positioning itself to maneuvere international crude oil prices to its advantage. Why it is so important for India to invest in scaling SPRs now when the world and indeed India too seem to be moving towards solar and other renewable forms of energy? The answer lies in the fact that despite huge renewable focus that India has, it would still need to rely on fossil fuels for a foreseeable future. India is the 3rd largest importer of oil in the world today. India imports 80% of all its crude oil needs and likely to spend $90 billion by March 2018 on its oil import bill. Given this, it is absolutely critical for India to ensure its energy security.

Back in early seventies United States built its first strategic crude oil reserve following an oil embargo imposed by Arab petroleum exporting countries on US and few other nations who were perceived to be supporting Israel in Yom Kippur war. This resulted in four-fold rise in oil prices from US$3 per barrel to US$12 per barrel [3]. US SPR was specifically aimed at protecting domestic economy from oil shocks in future due to supply disruptions. Over the years US has built the biggest strategic oil reserves (sand and rock caverns) in the world which can store 700 million barrels of oil [4] which annually takes approximately US$200 mn to maintain it. China is the second largest SPR holder with installed capacity of 70 MMT (approximately 500 million barrels). Although in case of China due to lack of authentic official information the SPR capacity is bit speculative. Japan, South Korea and Spain are the next three countries in terms of SPR capacity [5] however it is China’s determined effort of rapid storage capacity build-up in last decade or so should worry India more now. This storage is equivalent to 100 days of consumption at normal rates vis-à-vis India’s current storage capacity which is equivalent to 10 days of consumption at normal rate.

China started thinking about SPR in 1993 although the actual construction of the first four SPR projects with a capacity of about 100 million barrels commenced only in 2004. On the contrary, following the Gulf war in early nineties which posed a serious supply chain disruption challenge, India started thinking about developing strategic oil reserves in 1998 when Prime Minister A.B Vajpayee mooted the idea of Strategic Petroleum reserves and formed a company in 2004 to oversee the implementation of SPR. The Govt had then decided to set up 5 million metric tons (MMT) of strategic crude oil storages at three locations namely, Visakhapatnam, Mangalore and Padur (near Udupi) in India to cater for 10 days of oil requirements. By 2004, India and China were at the same level as far as the strategic storage capacity build up was concerned. It was in the decade that followed that China took a huge leap forward and created a capacity of 70 MMT, while India remained mired in indecisiveness at the Govt level and tardy progress on the implementation. By 2009, all of China’s Phase 1 SPR projects were in operation, containing about two weeks supply of oil. India was clearly seen lagging in implementation and India’s first phase of SPR was commissioned only in 2014-15 and the crude filling started thereafter in 2015. India has now set up a target of building 90 days equivalent of crude oil reserves by 2020.

To construct and manage the Strategic Crude Oil Storage facilities, Government of India formed a special purpose vehicle (SPV) called Indian Strategic Petroleum Reserves Limited (ISPRL) [6], which is a wholly owned subsidiary of Oil Industry Development Board (OIDB) under the Ministry of Petroleum & Natural Gas. The ownership of crude in SPR rests with the ISPRL and not with the Public-Sector oil companies.

India’s hitherto commissioned strategic storages of 5 MMT is expected to serve multiple objectives such as (I) serve as a cushion during any external supply disruptions like in gulf war e.g. IS occupation of oil supplier nation (ii) help manage oil prices in the domestic markets by regulating (drawdown) the supply from SPR, in case the international crude prices shoot up significantly like in 2012 when the crude oil prices had shot up to more than US$100 per barrel level (iii) to ensure energy security of India and sustained economic progress.

Besides these, countries have been leveraging SPRs in very many ways and these would certainly present a few lessons for India from the policy and governance perspective. For example, Obama in 2011 released 30 million barrels [7] from the American SPR into the market, ostensibly under the pretext of loss of Libyan crude to the global market, but in reality, for the domestic political reasons and to drive oil prices down. Trump administration recently made its intent public to make non-emergency sell of half of strategic oil reserves to reduce federal deficit by $16.6 billion [8]. In the past SPR assets have been sold off to meet financing needs of Highway Trust Fund. After its success with shale oil, US doesn’t need to maintain huge oil reserves and given the cost of maintenance it is trying to optimism the quantum stored in SPR. US has also used strategic reserves during natural calamity situations e.g. in 2005 hurricane Katrina caused massive damage to oil production facilities, pipelines etc. in Gulf of Mexico [9].

Given these and to avoid politicization of the decisions relating to SPR filling up, hold and draw down, pricing etc. as is being seen in US, India should set up an independent regulatory body SPR Regulatory Board to oversee the governance of all aspects of strategic petroleum reserves.  Currently an Empowered Committee constituted by the Government of India under Ministry of Petroleum has been mandated to release the crude from the reserves in the event of any supply disruptions from abroad or natural calamity etc. Since release or hold of strategic oil reserves has multi-dimensional impacts ranging from monetary to fiscal to current account, this is a good case to be brought under the ambit of comprehensive regulation.

Why India Needs to Scale Up SPR Quickly?

Strategic stake sale in Public Sector Undertakings though a good economic idea has always been mired in political controversies in India. Various governments have attempted disinvestment since 1991, but with a limited success. The biggest success so-far has been under the NDA government of 1999-2004, when PSUs like Maruti, VSNL, IPCL and IBP were privatized. It is hard to argue against the economic rationale for privatization. With higher expenditure plans for sectors including agriculture, health and education, Govt of India will have to continue to depend heavily on revenue from stake sales in public sector units. The stake sale in PSU besides being an arduous process is also fraught with market as well as political uncertainties. Alternately India can look at judiciously leveraging scaled up SPRs for financing the social sector schemes a la Modicare. This will provide the Govt with much needed freedom and flexibility to raise necessary funding for its social sector schemes

Given its geo-political location between suppliers on the west and the consumers on the east, an interesting opportunity for India would be to act as an oil storage hub for southeast and east Asian countries. This would require India to continue to plan its investments in hydrocarbon value chain and pipeline network with a view to minimize response time and construction cost. This would also mean planning for storage capacity beyond IEA mandated 90 days equivalent of normal domestic requirements. The recent agreement between ADNOC and ISPRL where ADNOC has been permitted to take storage capacity in India worth $400mn is a step in the right direction

China having built a huge SPR of 75 MMT storage has started actively leveraging its might to control crude oil prices in the international market and act as a balancing power to OECD countries. Although in 2017 China’s oil imports went up by more than 10% primarily for filing up the storage capacities but in coming years, China is likely to taper its oil imports since its reaching its storage capacity. Any reduction in China’s short-term crude oil import demand could lead to glut situation in the world market leading to fall in crude oil prices. Thus, SPR presents China with a huge bargaining power with OPEC countries. To ensure balance of power in the international oil market, India along with its partners like Japan must act in tandem to guard their strategic interests. This necessitates India to invest in scaling its storage capacity that can be leveraged.

Thus, by scaling its SPR India can gain both economically and politically by protecting itself against any future oil embargo while offering an opportunity to oil producing countries to leverage India’s geo-political location for improving their footprints in Southeast and East Asian countries in a much more economical way.

References: –

[1] Budget proposal about two additional strategic reserves https://energy.economictimes.indiatimes.com/news/oil-and-gas/government-to-build-two-strategic-crude-oil-storages-in-odisha-rajasthan/56919410

[2] Press Information Bureau, http://www.pib.nic.in/PressReleaseIframePage.aspx?PRID=1520423

[3] Oil shock https://en.wikipedia.org/wiki/1973_oil_crisis

[4] US Strategic Petroleum Reserves https://www.eia.gov/dnav/pet/pet_stoc_typ_d_nus_SAS_mbbl_m.htm

[5] Top five SPR capacity holder nations https://oilprice.com/Energy/Energy-General/The-5-Biggest-Strategic-Petroleum-Reserves-In-The-World.html

[6] Indian Strategic Petroleum Reserves Ltd http://www.isprlindia.com/

[7] Obama drawdown from SPR https://www.forbes.com/2011/06/27/strategic-petroleum-reserve.html#24571d342183

[8] SPR for reducing federal deficit https://www.washingtonpost.com/news/energy-environment/wp/2017/05/22/trump-seeks-to-sell-off-half-of-the-strategic-petroleum-reserve/?utm_term=.44f30e3a7a9fhttps://www.washingtonpost.com/news/energy-environment/wp/2017/05/22/trump-seeks-to-sell-off-half-of-the-strategic-petroleum-reserve/?utm_term=.44f30e3a7a9f

[9] SPR draw down during hurricane Katrina https://energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve/releasing-oil-spr#2005Katrina

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