Dipping into oil reserves — a token gesture

Is India future ready is the question that came to mind as one read a news flash stating that “The U.S. asks some of the world’s largest oil consuming nations like Japan, China and India to consider tapping oil reserves as it seeks action to cool rising prices.”

The US will release 50 million barrels of crude from its Strategic Petroleum Reserve as part of a unified effort with several other major oil-consuming countries to lower high fuel prices. Close on the heels of this news, on November 23, India said that it has agreed to release 5 million barrels of crude oil from its Strategic Petroleum Reserves.

“This release will happen in parallel and in consultation with other major global energy consumers including the USA, People’s Republic of China, Japan and the Republic of Korea,” the statement added.

The official statement went on to say that “India strongly believes that the pricing of liquid hydrocarbons should be reasonable, responsible and be determined by market forces. India 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.”

Details awaited

However, the dynamics of how this capacity will be evacuated and at what cost will the refiners get it, whether it will be in form of a loan or will the refiners that get this crude have to make an upfront payment, are still being worked out.

The cost at which Indian refiners sourced their crude oil averaged $82.11 a barrel in October and on November 19 the price was at about $80.70 a barrel.

While the dynamics are being worked out, it also raises a more pertinent question — what reserve is India talking about? The current strategic reserves capacity which India has can manage only nine days of the country’s demand. India’s domestic production is miniscule right now to meet the demand. The crude oil import figures for April-October 2021 stood at 118.5 million tonnes, costing about ₹4,53,129 crore.

In October this year, in his Closing Remarks at India Energy Forum CERAWEEK, Union Minister of Petroleum and Natural Gas and Housing and Urban Affairs Hardeep Singh Puri had said that unless the prices of crude oil are maintained at sustainable levels, the greenshoots of global economic recovery will be severely impacted. The Minister, when referring to the Commodity Markets Outlook by World Bank, had said that the cost of energy should not be allowed to outstrip the paying capacity of consuming nations. He had gone on to say that, “And this imperative needs to be configured by the consuming countries, in planning their production profiles for future.”

Last March, to a Parliament question on ‘Demand and Import of Oil’ then Union Minister of Petroleum and Natural Gas Dharmendra Pradhan had said, that the “Indian Strategic Petroleum Reserve Limited (ISPRL), a Government of India Special Purpose Vehicle, has established Strategic Petroleum Reserves (SPR) facilities with total capacity of 5.33 Million Metric Tonnes (MMT) at three locations — (i) Visakhapatnam, (ii) Mangaluru and (iii) Padur. Going by the consumption pattern of 2017-18, the total capacity is estimated to provide for about 9.5 days of crude oil requirement.”

Further, oil marketing companies (OMCs) currently have stocks for 64.5 days. Hence, the total capacity storage of petroleum products is 74 days, the Minister had said adding, “the government has given ‘in principle’ approval for establishing two additional SPR facilities with total storage capacity of 6.5 MMT at Chandikhol in Odisha (4 MMT) and Padur in Karnataka (2.5 MMT).

“As per the consumption pattern of 2017-18, 6.5 MMT SPR capacity is estimated to provide for about additional 11.57 days of India’s crude oil requirement. The government has also given ‘in principle’ approval for exploring public private partnership model for Phase II.”

And the situation remains the same today. Agreed, such projects cannot be set up overnight. India has been a late mover in building reserve capacities. How will India prepare for such situations? What are the options available for India?

Investing in storage

According to Narendra Taneja, energy expert, “We need to invest more and fast in our crude oil storage capacity, considering our dependence on petroleum products is only going to grow over the next two decades even as we continue to prioritise renewables. “Second, and more importantly, geopolitical realities in Asia and in the Indian Ocean are getting more alarming by the day, challenging our energy security in terms of maritime supply routes and lines. We need minimum 70 days storage capacity to sleep better.”

According to Vandana Hari, a Singapore-based oil market analyst and founder of Vanda Insights, “The twin imperatives of growing uncertainties over security of supply and India’s rapidly rising oil demand and import dependence make it crucial for the country to hold at least a month or two of needs in reserve. The IEA recommends 90 days of net imports.”

“Diversification of the energy basket and a gradual move to greener sources will reduce the country’s dependence on oil, but not for a decade or even two. That’s too long a period to remain exposed,” she stressed adding, “Inviting foreign partners, Middle East NOCs (National Oil Companies) to help build the infrastructure and store their crude may be a way to accelerate the development of India’s SPR.”

“If India wants to use SPR to moderate prices when other avenues of relief are shut or simply as leverage against OPEC+, it’s all the more reason to build the necessary capacity. Five million barrels is a token gesture, it won't move the needle on global supply,” she said. This brings us back to the same argument — India needs to ramp up production, expand its energy basket and more importantly re-strategise its energy policy by adopting a more integrated approach.

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