Given the low crude oil prices, it is welcome news that India is forging ahead on creating a dedicated strategic oil reserve. There has been movement on this front in the past month or so. The special purpose vehicle responsible for the construction and maintenance of India's oil reserve, the Indian Strategic Petroleum Reserves Ltd (ISPRL), has finished constructing one storage facility at Visakhapatnam, where it can hold about nine million barrels.

Two more facilities in Mangaluru and Padur ( both on the West Coast) with another 30 million barrels of capacity are expected to be ready by October. The Budget allocated Rs 4,900 crore for crude oil purchases for this strategic reserve. This would buy about 13 million barrels at current prices.

Indian Oil Corporation has purchased two million barrels of crude oil from China's Unipec to be shipped into Visakhapatnam in May. Three more purchases, totalling six million more barrels, are now being negotiated, to fully charge the Visakhapatnam facility.

The dedicated strategic reserve is long overdue, given India's massive import dependency. India consumes about 3.8 million barrels a day and has to import about 80 per cent of that. As a regional refining hub, India actually imports more crude oil than is domestically required, for refining and re-export. The country is now the world's fourth-largest oil consumer and comparative gross domestic product (GDP) growth rates imply demand will continue to rise quickly.

The International Energy Agency (IEA) predicts that by 2020, India will be the largest oil importer, increasing its vulnerability to threats of physical supply disruptions and to large price fluctuations. A strategic oil inventory is imperative for energy security given this scenario.

The IEA recommends that importers should hold 90 days of imports in a dedicated reserve. India is not an IEA member and the ISPRL facilities at Mangaluru, Visakhapatnam and Padur together offer just 11 days' capacity. But this is a beginning. The ISPRL targets the construction of another 90 million barrels of capacity, across four different centres. Taken together, all these constructions, with adequate transport linkages (by sea, road and pipeline), would cost close to Rs 20,000 crore.

The concept of dedicated strategic reserves was first mooted in 1973, after the first oil crisis. Western strategic reserves have been tapped during the first Gulf War (1991), after Hurricane Katrina (2005) and in 2011, during the so-called Arab Spring. But quite apart from disruption scenarios, there is a business case for holding such reserves.

ISPRL would have leverage in the international markets since it could release inventory and book profits when prices climb, and recharge reservoirs when prices fall again. Storage can also be rented out to refiners that wish to store inventories. Gulf and Saudi oil majors, such as Aramco, the Kuwait Petroleum Corporation and the Abu Dhabi National Oil Company, have all evinced interest in storage-refining in India since it reduces their transport costs into Southeast Asia. Obviously, India could retain right to first use in emergency while negotiating such deals.

In sum, the government's rapid action is wise and timely. It will be necessary, indeed inevitable, to build a strategic reserve at some stage. It is better that this is done at a time like the current situation, when crude oil prices are low and construction activity is also muted. It should make a positive long-term difference to India's energy security.

Source:business-standard.com