Trading on a buffer-Can India afford to commercialize its fuel reserves

News: Govt earlier this year allowed the Indian Strategic Petroleum Reserve (ISPRL), which runs the SPRs, to lease 30% of capacity and trade another 20%. 

The decision to commercialise half of India’s paltry SPRs is ill-conceived.

What is a Strategic Petroleum Reserve (SPR)? 

SPR initiative was launched in 1998 as India to bolster energy security of India as it had little foreign exchange available to import oil. 

The SPR inventory acts as a supply buffer in the event of unexpected disruptions or surges in demand.

Read more here. 

Why is government deciding to commercialize SPR? 

India’s decision to commercialise SPRs came after it filled the reserves cheaply in early 2020, averaging $19 a barrel. 

State oil companies, which were forced to honour term purchase contracts for crude, diverted fuel to underground caverns. 

Government will earn around $900 million with this. 

What are the associated challenges? 

India is surrounded by hostile neighbours and is dependent on imported crude thus cannot afford to commercialise its energy security. 

India still has very high crude oil demand which is only going to increase in future-It consumes around 4 million barrels a day of fuel, but its reserves can just about meet nine days of demand.  

Even developed nations such as the US, Japan and South Korea commercialised the reserves decades after building it to a position of strength in line with the IEA’s guidelines. 

– IEA mandates 90 days of the previous year’s net oil imports in storage (India is an associate member and this requirement is not binding). 

– The IEA forbids trading and typically allows release of stocks only during emergencies or supply shocks.

SPR is not for commercialisation as it can serve as India’s first line of defence during a calamity or conflict. 

Further, the SPR inventory acts as a supply buffer in the event of unexpected disruptions or surges in demand. Specially for net importers like India, Japan, Korea. 

How is China’s policy on SPRs different from India’s?

China has built around 500 million barrels of SPRs in a little over a decade and filled more than half the capacity, according to analyst estimates.

India has a tenth of what China has despite planning a decade earlier, reflecting the priority Beijing gives to energy security.

What is the way forward? 

India should build capacity fast and grow stocks to a comfortable level before considering trade. 

Specially in light of the fact that India is poised to face the fastest growth in oil demand in the next couple of decades, and its dependency on overseas crude is going to climb to over 90% by 2040 as per IEA.

South Korea has one of the best SPR models. It has a storage capacity of around 300 mb with nearly half coming from SPRs.

Source: This post is based on the article “Trading on a buffer-Can India afford to commercialize its fuel reserves” published in Business Standard on 30^th Dec 2021.