India has recently extended an invitation to Saudi Arabia, encouraging this country to participate in the construction of strategic oil reserves and to invest further in the refining and Petrochemical sectors of India.
The Indian government has expressed its worries regarding the global balance of oil and its supply. Various causes are behind these concerns. First on the list is that the energy needs of India are primarily fulfilled through imports. Hence, any instability in the worldwide balance of oil directly affects India.
Additionally, the constant potential for a rise in international crude oil prices is a persistent concern. Alongside this, the critical need for a steady supply of crude oil and LPG to India given the OPEC+ cuts adds to its challenges. Further, the sanctions imposed by the US administration on Venezuela’s state-owned oil company affect India’s supplies adversely. Moreover, the decision of the US to withdraw from the 2015 agreement with energy-rich Iran restricts India’s options to meet its energy requirements.
Strategic Petroleum Reserves: An Overview
Strategic petroleum reserves are essentially large quantities of stored crude oil, designed to respond to any potential crisis related to crude oil supplies. This can include threats from natural disasters, war, or any other calamity that may disrupt the regular supply.
Presently, strategic crude oil storages of India are situated in Visakhapatnam (Andhra Pradesh), Mangaluru (Karnataka), and Padur (Karnataka). However, in a recent development, the government has declared the establishment of two additional facilities at Chandikhol (Odisha) and Padur (Karnataka).
The concept of strategic reserves was first introduced in 1973 in the United States, in response to the first oil crisis. Storing oil in massive caverns deep below the earth’s surface has been traditionally viewed as an effective measure for ensuring energy security. This method serves to guard against potential future shortfalls in oil supply due to attacks, invasions, or other disruptions.
Storing petroleum products underground is currently considered the most economical option. This method eliminates the need for large parcels of land, ensures minimal evaporation, and facilitates easy discharge of crude from ships since these caverns are located well below sea level.
| Location | State |
|---|---|
| Visakhapatnam | Andhra Pradesh |
| Mangaluru | Karnataka |
| Padur | Karnataka |
| Chandikhol | Odisha |
India’s Increasing Vulnerability and the Commercial Angle
The International Energy Agency (IEA) suggests that by 2020, India could escalate to become the largest oil importer. Such a shift would make the country more susceptible to threats of physical disruptions in supply, thereby leading to drastic price fluctuations.
From a commercial perspective, having limited storage options allows India to play a significant role in international oil markets. With this advantage, India can release inventory during times of price surges and re-fill its reservoirs when there is a dip in crude prices.
Possible Solutions: Leasing Storage to West Asian Refiners
Expert suggestions point towards the viability of leasing storage to West Asian refiners, mainly as it cuts their delivery costs into Southeast Asian markets. The three facilities expected to be put into action in the first phase can store up to 13 days of India’s crude stock requirement. However, the IEA recommends a 90-day stockpile. Therefore, it is essential for India to construct more reservoirs before oil prices climb back up, given the recently decided production cuts by OPEC nations, aiming to stabilize global oil prices.
