India Economy

Oil reserves: It’s time to bring our A-game

Anand Kalyanaraman | Updated on July 08, 2018

The Centre should ensure timely completion of existing and new projects

The government’s recent approval to set up two more strategic petroleum reserves in the country deserves a thumbs-up. The proposed 4-million tonnes (mt) facility at Chandikhol in Orissa, and 2.5-mt facility at Padur in Karnataka, together, will more than double the country’s existing total capacity. Currently, there are underground caverns at Visakhapatnam in Andhra Pradesh (1.33 mt), and Mangaluru (1.5 mt) and Padur (2.5 mt) in Karnataka, totalling 5.33 mt. This will go a long way in boosting India’s energy security. The existing facilities can meet about 10 days of India’s crude-oil requirement, and the new facilities can store an additional supply of about 12 days.

But while this is a step in the right direction, what will really matter is speedy execution of these crucial projects. In the past, there have been huge time and cost over-runs with adverse implications for the country’s energy equation.

The need for strategic petroleum reserves — huge stockpiles of crude oil to keep the wheels of the country running in crunch situations — can hardly be overemphasised. India is the world’s third-largest energy consumer after the US and China, and we are dependent on imports for more than 80 per cent of our needs. A chunk of this is from West Asia, which is often in the midst of geo-political wrestling. There is no saying when some major supplier would toy with the idea of arm-twisting India. Add to this, there is always the risk of supply disruption from natural disasters, wars or other calamities. With the electric revolution still some time away, oil is expected to remain a dominant energy source.

Also, crude-oil prices are fickle. Few anticipated the fuel’s crash from triple digits in 2014 to less than $30 a barrel in 2016. Fewer anticipated the more-than-doubling since then to about $80 a barrel now. Strategic petroleum reserves’ capacity can be deployed to store oil bought cheap when the going is good, and used when prices hit abnormal highs. Many major global oil consumers such as the US, China and Japan have built massive strategic reserves of oil over the years. India, too, embarked on the path in the last decade with Indian Strategic Petroleum Reserves Ltd (ISPRL), a special purpose vehicle under the Oil and Gas Ministry, entrusted with the work of constructing the reserves in Phase I.

Time and cost overruns

Building strategic petroleum reserves deep under the earth is complex engineering, and the process can be long-drawn.

From land allotment troubles to unforeseen accidents, delays can occur for a variety of reasons, and are understandable.

But even so, it’s been a very long journey to fruition for the three reserves that were first envisaged in 2004. There have been multiple time over-runs.

According to the May 2013 report of the Standing Committee on Petroleum and Natural Gas, these projects were to be commissioned progressively from early 2014 onwards.

The 2016-17 Annual Report of ISPRL states that the Visakhapatnam project was commissioned in 2015, Mangaluru in 2016, and the Padur project, the largest, was yet to be commissioned.

According to the company’s website, as of April 2018, the cumulative physical progress as of end-April 2018 was 100 per cent in Visakhapatnam and Mangaluru, and 99.20 per cent in Padur. In effect, it took 11-12 years to complete two projects, and one project is yet to cross the finishing line. These delays have had significant cost implications, too. According to ISPRL’s 2016-17 Annual Report, the capital cost for constructing the strategic storage facilities, originally estimated at ₹2,397 crore at September 2005 prices, was revised to ₹4,098 crore. Storage cost estimates also zoomed from about ₹9,000 crore in 2005 to more than ₹23,000 crore in 2013, said the May 2013 report of the Standing Committee.

The crash in crude-oil prices since mid-2014 would have moderated this cost now. But an attractive opportunity to fill up the caverns during the rout until early 2016 has been lost.

Had the projects been completed on time, the country’s energy security could have been enhanced at a much lower cost.

Up the ante

The government, too, has been slow. The global norm is to have a cover of about 90 days of crude-oil import. In 2014, the three reserves, along with the storage facilities of the oil companies, were expected to create a cumulative capacity of about 31 mt — about 70 days of crude-oil import. For the remaining, additional storage is needed.

Talks about creating four additional strategic reserves totalling 12.5 mt have been going around for many years now, and also have found mention in the Budgets. But it is only now that the government has granted approval, that too, only for an additional 6.5 mt storage at two locations. Meanwhile, crude-oil consumption in the country has been increasing rapidly, and the gap between optimal and actual storage has widened.

It’s high time the government brought its A-game to the critical work of bridging the oil storage gap — by approving new strategic reserves, and ensuring timely completion of existing and new projects.

The Centre is exploring the public-private partnership (PPP) mode for execution of the recently approved underground caverns, and plans to approach potential investors. The track record of PPP projects in India, by and large, has been uninspiring. But this time, the government should ensure a successful outcome for the sake of the country’s energy security.

Published on July 08, 2018

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