India’s Strategic Petroleum Reserves

In 2014, the US became the largest producer of oil thanks to the increase in extraction from shale rocks. According to the International Energy Agency, US oil output is likely to surge to 13.1 million barrels a day by 2019.   As a consequence, the lower crude oil prices that we are witnessing today are,  in all likelihood, here to stay. The Indian economy has much to gain from this fall in oil prices as it has already brought  inflation down and can continue to positively impact the current account and trade balance.

In the run up to the highly anticipated budget in February, this trend of lower prices should not be viewed as a short-term gain for the economy. Instead, the situation should be used to strengthen the Strategic Petroleum Reserves to mitigate the risks to the Indian economy when crude oil prices recover; the reserves, if strategically built and expanded, would be a cushion against further price shocks. They might also prove beneficial when India negotiates deals with oil-producing countries.

The building of these reserves is tasked to a Special Purpose Vehicle called the Indian Strategic Petroleum Reserves Limited (ISPRL), which is owned by the Oil Industry Development Board (OIDB). The ISPRL aims to enhance “the existing storages of crude oil and petroleum products with the oil companies and serve as a cushion in response to external supply disruptions”. The storage units planned in Visakhapatnam, Mangalore and Padur are expected to hold 5 million metric tons of crude oil (7-9 days’ worth consumption). An aggressive second phase that will increase the capacity by an additional 12.5 million metric tons (20-25 days’ worth consumption) is also being planned. To put these numbers in perspective, 1 million metric tons of oil equals 7.33 million barrels oil; India’s oil consumption is expected to become 5.19 million barrels per day by 2025.

Although the prices are likely to stay low, strategic reserves are intended to act as a buffer against all contingencies. Ideally, the capacity addition must happen now as oil prices are low, but the ability to deploy the reserves must be factored in the design and implementation of these projects as well. However, there is a lack of clear communication on both capacity and deployment. The OIDB website says that the “Strategic Crude Oil Reserves would be in underground rock caverns and are expected to be operational by 2012”, but the following table on the ISPRL website paints a different picture:
Status of Completion

Regarding deployment, the ISPR website merely mentions that it “will have ownership and control of the crude oil inventories and will coordinate the release and replenishment of Crude Oil Stock during supply disruptions through an Empowered Committee to be constituted by the Government of India”. There is no further statement or clarification on the nature of these disruptions or the method of deployment to oil marketing companies.

As can be seen, India’s strategic reserve programme is still in its infancy and lags behind its international counterparts. With a capacity of 727 million barrels, the US Strategic Petroleum Reserve  is the largest government-owned emergency stockpile of crude oil in the world while China also recently made its first public announcement about its strategic reserves that hold 91 million barrels of crude oil. Come February, Mr. Jaitley will hopefully address these shortcomings of India’s strategic petroleum reserves and initiate a judicious plan to ensure that India will be prepared for a rainy day.

Update: August 3, 2015

There is an update on the ISPRL website about the status of project completion in each of the three locations

ISPRL

The Visakhapatnam cavern storage facility is ready to receive crude oil. The facility is expected to be commissioned in May 2015. The Mangalore & Padur projects can be commissioned after the cross country pipeline is completed. Order for the pipeline laying was placed on 3rd July 2014. The pipeline laying is scheduled to be completed by June 2015, however some unexpected hurdles are being faced. Commissioning of Mangalore and Padur is possible in October 2015, if the pipeline works are allowed to be continued unimpeded.

Finance Minister Mr. Arul Jaitley recently “sought an allocation of Rs.1,153 crore for buying crude oil to fill the first strategic crude oil reserve being built at Visakhapatnam by ISPRL”. The news report says the facility is being built, while the ISPRL site says the facility is ready to receive crude oil.

It will be interesting to see the average price the reserves will be maintained at.

3 Responses to India’s Strategic Petroleum Reserves

  1. karthikshashidhar February 8, 2015 at 1:44 pm #

    An easier way to maintain strategic petroleum reserves is to simply operate in the F&O market and buy long-dated derivatives that lock in today’s prices.

    • Ajay Kumar February 11, 2015 at 11:37 pm #

      no its not..in case of war transportation will not be possible..monetary gains will not help much when you need actual physical commodity

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