Why India’s Strategic Crude Oil Reserves Need A Boost

The crude oil market had been seeing a slump for a few years now. In the beginning of 2020, following an intensified competition between Saudi Arabia and Russia over market dominance in crude exports, oil prices took a further hit. But no one could predict anything that came remotely close to what oil markets have been subjected to in the last few weeks.

With an unprecedented drop in demand following global lockdowns in response to the Covid-19 pandemic, crude oil prices have been at the lowest levels in three decades.

The drastic price drops in both the WTI and Brent benchmarks have presented India with a unique opportunity to stock up on its crude oil reserves.

Opposition parties have been quick to criticise the government’s inadequacy in seizing this opportunity.

The Indian government has stated an intent to stockpile crude oil to take advantage of the prices, but is the intent backed by enough storage capacity?

No doubt, India is in a unique situation that would have been impossible to foresee even a few months ago.

On one side, the advantage of cheap crude oil will significantly boost national energy security and on the other hand it is plausible that the pandemic can induce more severe shutdowns of crude oil jetties in India. This will result in a serious disruption of crude oil supply, exactly the kind of crisis where the energy security policy of a country will be put to test.

India’s Crude Oil Needs

India is the third largest consumer of crude oil in the world after the US and China, but a bulk of its requirements — more than 80 per cent (about 4.4 million barrels per day) is imported.

With declining domestic oil production coupled with a projected doubling of daily oil consumption by 2030, India’s economy and national security become extremely vulnerable to potential disruptions in supply, commonly predicted for times of war and more uncommonly, but equally plausibly, for a pandemic crisis such as the one today.

It is for this reason that India needs to have adequate crude oil reserves in the form of strategic petroleum reserves (SPR).

How Strong Is India’s SPR?

The International Energy Agency (IEA) recommends emergency oil reserves (crude and refined) equivalent to at least 90 days of net imports, a global benchmark to assess the health of a country’s SPR.

India’s SPR policy has been a relatively young initiative. The Atal Bihari Vajpayee government initiated studies to understand feasibility for setting up SPRs in 1998.

Preliminary studies were conducted in November 1998 followed by detailed feasibility studies between 1999 and 2001. These studies revealed Visakhapatnam, Mangalore and Padur to be the most suitable SPR sites in 2005.

The sanction for funding and project execution was provided by the government of India in January 2006, leading to the creation of Indian Strategic Petroleum Reserves Limited (ISPRL).

As part of Phase 1 of the SPR programme, India has storage facilities in underground rock caverns at three locations: Visakhapatnam (9.77 million barrels), Mangalore (11 million barrels) and Padur (18.37 million barrels).

This total storage capacity of 39.14 million barrels, which equals around 10 days of crude oil net imports, came online in phases, starting with the commissioning of the Visakhapatnam facility in June 2015, followed by the Mangalore facility in October 2016.

Both went online after seven years of construction.

Finally, the biggest facility of all, Padur, was commissioned in December 2018 with construction work having started in May 2010.

Factoring in the 65 days’ worth of storage that Indian refiners are required to maintain along with the Phase 1 SPR facilities, not only is India still 15 days short of the minimum requirement as per International Energy Agency (IEA) norms, it also explains why we cannot hoard up on crude oil on a whim, simply because the prices look tantalising.

A Comparison

To understand what India needs to do to improve its energy security, a look at the health of SPRs of other countries would be helpful.

Based on a recent comment by a National Energy Administration (NEA) official, China has around 80 days of oil in storage, including those in its SPR, oil storage at national oil firms and commercial stocks, all of which equates to about 790 million barrels.

Even so, there have been reports of China increasing purchases of cheap crude to fill up their SPR facilities.

Japan is estimated to have an in-country crude oil storage capacity of 320 million barrels and an overall total crude storage capacity, including privately held reserves, of 580 million barrels. This is equivalent to about a total storage capacity of above 150 days, way above the minimum prescribed by the IEA.

A Work In Progress

In June 2018, the Indian government gave its approval to set up additional SPR capacities of 19 million barrels in Padur and 28.5 million barrels in Chandikhol, Odisha.

Once operational this will be an additional 47.5 million barrels, which is equivalent to 12 days of crude oil import bringing the total reserve capacity for India to 87 days, putting it within close distance of the 90-day target recommended by the IEA.

Following the announcement of Phase 2 of India’s SPR, however, there has been little progress on the status of either facility.

It is understood that the government wants to carry this phase out with a public private partnership (PPP) approach.

Ideally, a decision on the contractors should have been made towards the end of 2019 but that does not seem to have happened. The current Covid-19 situation and delays in decision-making notwithstanding, it is vital that India completes the commissioning of Phase 2 in four to five years from the start of construction, at the earliest.

The Phase 1 reserves, from the conception of the idea of strategic reserves in 1998 to the full commissioning of the first SPR facility in 2015, took approximately 17 years.

In contrast, the first SPR in China took close to five years from concept to operation.

From the first facility in Zhenhai in 2004 to four facilities in Phase 1, China built a capacity of 102 million barrels by 2009.

Phase 2 with a planned storage of 280 million barrels started in 2011 across eight additional sites, the locations of which were never made official.

The Phase 2 facilities took less than four years to complete. There are now reports of a Phase 3 with a planned addition of 150 million barrels in Tianjin by the end of 2023.

Aiming For Quick Laps And Easy Wins

While China provides an overwhelming account of how rapidly a nation built up a SPR programme from scratch, there is very little insight to draw any helpful strategies from.

For that, it might be prudent to look towards Japan.

For starters, Japan’s SPR programme, commonly referred to as ‘oil stockpiling’ is transparent, and is open to collaboration with other nations. Japan has had a strategic petroleum reserves programme since the early 1940s.

In 1975, with the passing of the Oil Stockpiling Act, the country streamlined its SPR policy to give it the efficient edge it has today.

There are three components to Japan’s reserves: government oil stockpiling, private sector oil stockpiling and joint stock with oil producing countries.

The act sets a 90-day target for the government and 70 days for the private sector.

The joint oil stock is a recent arrangement with Saudi Arabia and the United Arab Emirates (UAE), which commenced in 2009, where reserves are stored in tanks located in these countries.

There is currently 10 million barrels of Japan’s strategic crude oil reserves being stored in both Saudi Arabia and the UAE.

The Indian government could also take guidance from the Japanese approach by creating SPR legislation, which could ensure the expedition of SPR projects. The legislation could also push for the private sector to increase its storage from 65 days to, say, 75 days.

Like Japan, India needs to seriously consider setting up strategic reserves from between five to 10 days in important oil producing nations such as Saudi Arabia, the UAE, Russia and even the US.

It is well known that infrastructure projects in India are often impaired by slow decision-making, bureaucratic red-tape and various legal challenges brought about by public interest litigations (PIL).

However there comes a time when projects of national importance that address strategic vulnerabilities need to be championed until on-schedule operations.

The experience and learnings from Phase-1 will need to aid in the faster completion of subsequent phases.

Considering the volatility of the oil prices and the increasing geopolitical challenges in the Indian Ocean region, with a pandemic on the loose and the inevitable economic challenges added to the mix, it is of critical national importance that India completes the Phase 2 of SPRs with as little pilferage of time and resources as possible.