Building on strategic reserve

With the country consuming more than four million barrels of crude a day, the argument for a strategic oil storage project is a no-brainer.

May 28, 2015 12:08 am | Updated August 10, 2016 12:21 pm IST

Difficult task: “Adding 12.5 million tonnes of stockpile would take at least five 5 years to build.” Picture shows a petrol pump in Mumbai.

Difficult task: “Adding 12.5 million tonnes of stockpile would take at least five 5 years to build.” Picture shows a petrol pump in Mumbai.

In 1990, as the Gulf war engulfed West Asia, India was in the throes of a major energy crisis. By all accounts India’s oil reserves at the time were adequate for only three days. While India managed to avert the crisis then, the threat of energy disruption continues to present a real danger even today.

To address energy insecurity, the Atal Bihari Vajpayee government mooted the concept of strategic petroleum reserves in 1998. Today, with India consuming upwards of four million barrels of crude every day (January 2015 figures), the case for creating such reserves grows stronger. It is unlikely that India’s energy needs will dramatically move away from fossil fuels in the near future. Over 80 per cent of these fuels come from imports, a majority of which is sourced from West Asia. This is a major strategic risk and poses a massive financial drain for an embattled economy and its growing current account deficit.

Global and domestic scenes

In March, Saudi Arabia and a coalition of regional allies launched a military operation in Yemen against the Houthi rebels. This clearly indicates the deep-rooted fissures in the Gulf. An end to the conflict does not appear to be on the horizon. This impacts India and it continues to bear the brunt of uncertainty of global crude supply and pricing. A case in point is the March 2014 test sale of five million barrels of crude from the U.S. emergency oil stockpile, the first since 1990, which saw global oil prices dip by $2. While it sent a powerful message to Russia, it also delivered a subtle warning to India. Oil being the vital commodity that it is, mere ‘intent’ can affect supply-demand dynamics considerably — an issue that oil importers like India simply cannot ignore. However, opportunities to change this tide do exist. With a stable political situation and readily accessible markets, India is in a good position to address some of its disadvantages.

India has been slow in getting off the starting block. Its strategic oil reserve project was mooted in 1998 and commissioned in 2003. After extensive land acquisitions and tackling site suitability, security and design-related issues, it was only in February this year that the country began filling up a strategic storage facility. With the government planning to add storage capacity to the tune of 39 million barrels in the future, India stands poised to cover only a 10-day supply of imports (January 2015 figures). This is well short of Vision 2020 that envisages 90 days of imports, conservatively pegged at almost 360 million barrels of oil, according to 2014 figures.

But all this capacity building is expensive. For instance, 10 days of imports are pegged at almost Rs. 4,000 crore for infrastructure and subsequent storage costs work out to $17-18 per barrel. Moreover, there is also a time delay involved. According to a 2012 statement by Rajan Pillai, CEO, Indian Strategic Petroleum Resources Ltd, adding 12.5 million tonnes of stockpile would take at least five years.

Despite these constraints, recent moves by countries like China, Japan, South Korea or even relative minnows like Kenya and Malawi make India’s dilly-dallying inexplicable. However, there is a silver lining for India. While China has a head-start on India, evident by its incessant stockpiling since the supply glut began, India’s open governance structures and its convenient trade-geography as well as its historic trade links with the Persian Gulf may help its cause.

Commercial imperatives

Considering the volatile energy situation in the Gulf and elsewhere, can India really afford to waste time or spend unnecessary money on this issue? The fact that India imports almost 80 per cent of its oil and boasts of a world-class high-capacity refining infrastructure makes the possibility of commercially-led but strategically regulated storage alternatives a no-brainer. This is where ‘commercial agreements’ come to the fore.

By getting into commercial ‘forward’ agreements with exporters/ refiners, India can benefit from closer access to the commercial reserves while reducing the cost of access. This can be done by inviting investment in the stockpile programme, and through tie-ups with Gulf producers. In 2005, Saudi Aramco had mooted a similar plan, but nothing came of it. Reassessing such initiatives under the current geopolitical circumstances could result in a cost-efficient and time-bound plan that reconciles capital, energy and infrastructure in the most effective manner.

Beyond such commercial engagements, agreements around obligatory sharing mechanisms during emergencies could help address India’s critical energy security concerns. Such clauses can be instituted for national contingencies, or as goodwill gestures with our neighbours to service their needs during exigencies.

Finally, considering the government’s interest in boosting infrastructure development and its focus on reclaiming the geopolitical high-ground, this initiative can symbolise a great milestone — a pragmatic Vision 2020 towards creating a semblance of ‘control’ in an area over which it has traditionally enjoyed very little. This will ensure that India will never have to see the dire days it saw during the 1990 crisis.

(Anshuman Mainkar is a former fighter pilot from the Indian Air Force.)

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