Oil reserves to be used for stabilising prices

Private sector to be roped in.

To check the volatility in the fortunes of public sector oil marketing companies, the government intends to use its upcoming strategic crude oil reserves to stabilise oil prices.

With retail fuel prices under government control, these oil marketing companies have suffered huge under-recoveries on the sale of petrol and diesel with the rise in global crude oil prices.

For the April-September 2006 period alone, gross under-recoveries are pegged at Rs 33,143 crore, compared with an estimated Rs 40,000 crore in the whole of 2005-06.

Global prices of crude oil and petroleum products have hit new highs in the last two years. The Indian basket of crude oil touched an all-time high of $75.30 per barrel on August 8, 2006, before dropping below $60 recently.

The government is also considering roping in the private sector instead of just relying on budgetary support for setting up the reserves.

Apart from the 15 million metric tonne core strategic storage that is being set up at three locations in south India, it is also considering setting up a number of secondary storages at other places across the country.

The size of these secondary storages is not known yet but the intention is to use the reserves for managing supply side disruptions as well. In so doing, the government will also retain the flexibility of putting the reserves to other use.

Of the 15 million metric tonnes, a 5 million metric tonne storage is being set up at Mangalore. A special purpose vehicle, the Indian Strategic Petroleum Reserve Ltd, has been formed to undertake this. Indian Strategic Petroleum Reserve Ltd, whose equity is held by the Oil Industry Development Board, may be encouraged to enter into private partnerships to set up the secondary storages.

The country's strategic oil reserves have taken a long time in coming up. Conceived nearly a decade ago, it was only in 2003 that the plan picked up pace. It has faced hurdles, including non-availability of land. Had the reserves been set up earlier, the crude oil cost would have been much lower than today.

The estimated cost of the initial core storage includes a capital cost for the construction of the reserve facilities at Rs 2,397 crore. The cost of the crude oil has been pegged at Rs 8,870 crore, assuming $55 per barrel of crude oil as the average cost of the India basket and an exchange rate of Rs 44 to a dollar.

The funding will come from the funds available with the Oil Industry Development Board (a corpus of Rs 55,000 crore now).