Why India needs to store more oil

Sandip Sen | Updated on July 14, 2014 Published on July 14, 2014

Many more like these They can help ensure energy security BONZODOG/SHUTTERSTOCK.COM


That will help us negotiate market volatility better and cut our reliance on world energy cartels

The lack of a long-term energy security plan, which includes storage, is being sorely felt in the form of inflationary pressures. Diesel prices went up by over ₹10 per litre, in 15 small incremental steps, after the UPA decided to phase out subsidies in January 2013.

Though this has lowered the under-recoveries of oil marketing companies such as IOC, BPCL and HPCL, the higher price of diesel affects the pricing for truck and rail movement of goods.

The Government’s commitment to tame inflation cannot be achieved unless a long-term plan is drawn out to deliver diesel at affordable prices, without subsidies. Petroleum subsidies need to be phased out, but doing so requires proper planning lest it sparks recurring rounds of freight price rise and high inflation. So, what’s the way out?

The US lesson

Here, India can learn thing or two from US president Barack Obama’s strategic energy initiative that reduced prices of Texas crude by 20 per cent, making it considerably cheaper than Brent crude.

Augmenting tank capacities at Cushing allowed the US to selectively buy crude at price troughs and use its inventories during price peaks. So effective was the strategy that Texas crude prices dropped dramatically between 2009-11.

Historically priced above Brent crude, the superior Texas crude is now available at nearly 15 per cent lower than the North Sea produce, making US energy prices lower than that of Europe.

Having adequate oil storage capacities permits avoiding volatile upswings of the international crude market. Selective buying at low points along with augmented supply of cheaper Canadian crude helped the US lower procurement prices by 15 per cent to 20 per cent over a year.

Storage issues

Since December 2006, energy ministers of five major oil importing nations, the US, China, Japan, India and South Korea who together account for nearly half the global consumption, have met over half a dozen times to create a joint strategy for oil procurement.

These meetings have been primarily held to persuade China and India to increase their oil storage reserves both for national emergencies as well as for commercial purposes.

This would help reduce the immediacy of buying and dampen effects of global oil volatility. After much prodding by the US and Japan, India started building its underground storages at Visakhapatnam in Andhra Pradesh and Mangalore and Padur in Karnataka to store about 5.33 million tonnes (mt) of crude oil.

These storages would be ready by this year, but they barely cater to two weeks of oil consumption of crude. No action was taken to build commercial tank farms like China did.

The US and Japan, which have ‘tank farms’ that can store oil for 180 days, can resist global supply shocks; they want other big importers do their bit so that it impacts world prices.

South Korea, also a member of the 28 nation body of International Energy Agency, had the minimum 90 days’ stock recommended by IEA. In 2010, China and India had a 20 day and a seven-day buffer stock position, respectively.

Today, China has over 60 days’ stock of crude while India’s reserve allows it just 10 days’ comfort. This makes India overly dependent on short-term purchases and the tenders that its oil marketing companies float are very easily manipulated by the ICE cartel at what is known as the ‘London loophole’.

By not adopting this basic strategy of having a buffer stock, India has played into the hands of the Swiss commodity traders such as Glencore, Trafigura and Vitol, who along with oil majors such as BP, Shell and Total and large banks such as Morgan Stanley, Goldman Sachs and Societe Generale form the ICE cartel at the London Commodity Exchange and manipulate the markets of Brent, Nigerian and Dubai crude.

Imports of crude in India have increased during the last decade from two-third to four-fifth of consumption, but storage has not kept pace, worsening the situation. India needs more tank farms and pipelines to augment its buffer stocks and buy oil when prices are low.

Energy security

This is important because it forms a key part of the country’s energy security plan. Interestingly, India is the lone exception among the major oil importing nations, which has ignored firming up an energy security plan.

Take China. In 1986, visionary Chinese leader Deng Xiaoping unveiled the historic ‘State High Tech Development Plan’ prepared by scientist Wang Ganchang and his team of engineers. The ‘863 Plan’ was a long-term route map devised to make China a self reliant nation and focussed on seven core areas, including energy security.

In the US, Obama’s ‘Energy Security Trust’ has adopted a similar approach, pursuing all energy sources with equal vigour with an aim to eliminate dependence on foreign oil and technology and ensure complete self reliance and energy security for America.

This is where the Government needs to take some initiative. An energy security plan must be drawn out independently for all energy resources such as oil, gas, coal, lithium, hydropower, nuclear, solar, wind, biofuels, electric vehicles and other renewable sources, with an aim to augment domestic energy sector capacities and make India self reliant.

The writer is a freelance journalist

Published on July 14, 2014
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