Strategic opportunity

The Petroleum Minister’s push for a dynamic crude oil sourcing mechanism by PSU refiners comes not a day too soon. Creating an adequate store of crude oil is a vital strategic need, given our import dependency and the increased political volatility in major crude production centres. It also makes for sound economics, allowing India to take advantage of price drops and dampen sudden price spikes. Unfortunately, unlike their nimble-footed private sector counterparts, PSU refiners find themselves tied by red tape when it comes to crude purchases, leading to higher procurement costs. The term contracts used in most of their crude oil sourcing have restrictive guidelines that do not allow negotiations with suppliers. PSU refiners are also not permitted to buy distress cargoes and have to use costlier free-on-board shipping. Ensuring supply security by way of term contracts is fine, but PSU refiners also need to be given adequate leeway to benefit from favourable pricing dynamics. The Government can also encourage the refiners to adopt financial solutions such as forward contracts to lock into lower rates and hedge exposures to crude oil price and currency volatility.

With more than three-fourth of its crude oil requirement met through imports, the steep fall in oil prices over the last few months has been a godsend for India. It should moderate inflation and give a leg-up to economic growth. But this is possible only if refiners have the flexibility to modify their sourcing strategy according to current and expected price of crude oil. The Government has also failed to get its act together in creating adequate strategic storage facilities for crude oil. The underground storage caverns at Visakhapatnam, Mangalore and Padur, that were envisaged a decade back and are being executed by the Government-controlled Indian Strategic Petroleum Reserves Ltd, are running many years behind schedule. Estimated construction costs have nearly doubled between 2005 and 2013. Storage cost estimates have also risen from about ₹9,000 crore in 2005 to more than ₹23,000 crore in 2013. This is a price the country should not be paying.

However, there appears to be some light at the end of the tunnel, with construction expected to be completed next year. The Government must ensure timely project completion and adequate fund availability so that the country can kick-start this critical project. Together, these three facilities can store 5.33 million tonnes of crude oil. This, along with the storage facilities of the oil companies, is expected to create a cumulative capacity of about 31 million tonnes — that’s a cover of about 70 days of crude oil imports. To move towards the global 90-day norm, four more strategic storage projects with capacity of 12.5 million tonnes have been planned; the construction of these facilities needs to be expedited too. The US, China and Japan have raced ahead with their strategic storage reserves; it’s time India catches up.

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