Low oil prices are sure to encourage countries to create such reserves. China is already engaged in building reserves. The opportunity should be exploited to beef up oil reserves.
What is a Strategic Oil Reserve ?
The Strategic Oil Reserve is an emergency fuel storage of oil . They are a nation’s counter against any short-term disruptions in energy supplies. These are typically state-funded and are meant to tackle emergency situations. Crude oil from these reserves can be released when there is a short-term supply disruption, a natural calamity or a global event such as a war that may lead to an abnormal increase in prices. According to the 2001 agreement, all member countries of the International Energy Agency must have a strategic petroleum reserve equal to 90 days of prior year’s net oil imports for their respective country.
India’s Strategic Oil Reserves
India had planned of a strategic petroleum reserve as way back in the 1990s . After much sarkari deliberation and studies, it was decided in 2004 that a strategic oil reserve will be built with a capacity of 5 million metric tonnes. Where would they be located ?
- Padur ( near Udupi )
The storages would be in underground rock caverns on the east and west coasts so that they are readily accessible to the refining sector. Underground rock caverns are considered the safest means of storing hydrocarbons.
A special purpose vehicle — Indian Strategic Petroleum Reserves Ltd. (ISPRL) — was floated under the Oil Industry Development Board to implement the project.
Government wasted a decade more reviewing the plan. None of the three planned storages has been completed till now.
During the monsoon session , Government clarified that the reserve at Vizag would be filled by the end of 2014 and the other two by mid 2015.
It was also announced that Four more strategic storages would be built in :
- Chandikhole in Odisha
These four will have a combined capacity of 12.5 million tonnes. This is in addition to commercial storage of crude and petroleum products of about 30 million tonnes (about 70 days’ needs) available with the oil companies at any given point in time.
Challenge is implementation. Why ?
Storages are built in underground natural rock caverns through excavation. Funding and building these caverns is a relatively easier challenge than filling them up. The oil stored in these reserves will be stocked and not consumed which means that the cost of financing will be huge. Only the government can conceivably fund this storage as there is unlikely to be a viable commercial model for private developers to exploit.
Falling oil prices are a blessing. The cost of filling up these caverns is 40 per cent lower now at roughly $65 a barrel compared to just six months ago when price averaged at $115 a barrel. Had the project not been delayed, the country could have benefited by filling up the caverns now at the current cheaper prices. It means that costs have escalated and the opportunity to secure the country’s energy supplies has been squandered.
Analysts claim opportunity is not lost yet. The low oil price regime is projected to continue well into 2015. With demand well short of supply and the OPEC not cutting on production, oil prices might continue to tumble.
The government still has the window to exploit if it is able to complete the ongoing three storage projects expeditiously and start filling them up.
Once the storage is built, the dirt collected from Swacch Bharat Abhiyan won’t be filled into it. We need oil. For that we need $. How to fund the crude oil purchase? It has been calculated that filling up the entire 5 million tonnes capacity at current prices will cost about $2.73 billion and filling the upcoming four storages would cost around $6.5 billion at current prices. India spent $143 billion on oil import in 2013-14. India can spend this much , right ? No, not really. some out of the box solutions are required.
Supply is way ahead of demand. The capability to store crude oil will play an important factor in determining the resilience of oil producing nations to endure this price slump. In past, producers like Iran have commissioned very large crude carriers (VLCC) to act as floating storage to ride out temporary market difficulties. The government can strike a deal with one or more oil producers on mutually beneficial terms to offer the newly built caverns for storage. In fact a part of the storage capacity could be leased out to a couple of Gulf producers.
In addition to this, the government could weigh a special cess on petrol and diesel or impose a small import duty of 5 per cent on crude oil to fund the reserve build-up. This can be done in the current environment of soft prices without inflicting pain on consumers.
Benefits of Having Strategic Oil Reserves
• Strategic reserves are particularly important for countries like India that are heavily dependent on imports to meet their energy needs.
• To ensure energy security these strategic storages are in addition to the existing storages of crude oil and petroleum products with the oil companies and would serve as a cushion in response to external supply disruptions.
What is required though is planning and shrewd execution. Building up the reserves is not an exercise that can be completed in a week’s time. The United States built up its 727 million barrels of strategic reserve gradually over two decades. With a capacity of 727-million-barrels, the U.S. Strategic Petroleum Reserve is the largest stockpile of government-owned emergency crude oil in the world.
China, boasts of over a 100 million barrels of strategic reserve. The tumbling global oil prices have put China on a buying spree that led to record crude imports in December. Shouldn’t India learn a thing or two ?
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