Trading on a buffer: Can India afford to commercialise its fuel reserves?

India's decision to commercialise half its strategic petroleum reserves could jeopardise its energy security

Can’t India, a $2.7-trillion economy aspiring to be $5 trillion, afford to store $1 billion worth of oil as a buffer towards energy security? Or, can India, surrounded by hostile neighbours and dependent on imported crude afford to commercialise its energy security? And, if so, what is strategic about the Strategic Petroleum Reserves (SPRs)?

It is unclear if the government thought through these issues before taking a decision to commercialise half of its paltry SPRs. What it rather needs to do is to build capacity fast and grow stocks to a comfortable level before considering trade, especially given the fact that India is poised to face the fastest growth in oil demand in the next couple of decades and see its dependency on overseas crude climb to over 90 per cent by 2040, according to the Paris-based International Energy Agency (IEA). 

Developed nations such as the US, Japan and South Korea, which India chose to emulate for changes in its SPR policy, commercialised the reserves decades after building it to a position of strength in line with the IEA’s guidelines, which mandate 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.

“It’s like money you save for a rainy day,” said Vandana Hari, a Singapore-based oil expert. “You don’t invest (those savings) in stocks.” It’s more important that India increases its buffer stocks because it will continue to be dependent on more and more imported oil, Hari said. India consumes around 4 million barrels a day (b/d) of fuel but its reserves can just about meet nine days of demand.

The government earlier this year allowed the Indian Strategic Petroleum Reserve (ISPRL), which runs the SPRs, to lease 30 per cent of capacity and trade another 20 per cent, said HPS Ahuja, CEO, ISPRL. India has 39 million barrels (mb) of SPR capacity in three underground caverns at Visakhapatnam (9.7 mb), Mangalore (11 mb) and Padur (18.3 mb). The government has leased half of the reserves in Mangalore to Abu Dhabi, which leaves it with around 33 mb capacity to store, rent or trade. ISPRL has permission to commercialise 16 mb, which at current prices will net the government around $900 million. The government has also agreed to sell 5 mb to coordinate with Washington’s decision to release SPR crude, valued at $280 million (China, Japan, South Korea are yet to commit).

India’s decision to commercialise SPRs came after New Delhi filled the reserves cheaply in early 2020, averaging $19 a barrel, according to former oil minister Dharmendra Pradhan. The pandemic and resultant shutdowns sent demand plunging and crude prices to multi-year lows. State oil companies, which were forced to honour term purchase contracts for crude, diverted fuel to underground caverns. 

It must have cost around $600 million to fill the SPRs, India’s first line of defence during a calamity or conflict. Cheap, considering that India paid $72 billion for crude imports in April-November, according to oil ministry data. The cost of energy security also pales in comparison to the $10 billion earmarked for semiconductor production. The new generation Rafale aircraft, acquired at a cost of billions of dollars, still needs jet fuel to fly, while the army needs diesel to transport trucks and tanks to the borders.  The oil ministry did not respond to queries.

“You must look at SPRs as serving a primary purpose of holding emergency stockpiles,’' said Singapore-based John Driscoll, a veteran oil trader, strategist and director at JTD Energy Services.  “This is critically important for net oil importers like India, Japan, and Korea.”  The SPR inventory acts as a supply buffer in the event of unexpected disruptions or surges in demand.  

India’s copycat policy ignores the fact that developed nations have built massive SPRs, stored more than adequate oil and are now commercialising some of it even as they seek to eliminate fossil fuels gradually on the road to net zero carbon economies. The US Congress has authorised non-emergency sales of oil and set up a programme to lease SPR storage space, which is over 700 mb in capacity. But the US, which was earlier dependent on imported crude, has turned into an oil and gas exporter after developing shale reserves. Japan and South Korea maintain stocks over twice that of IEAs minimum mandated 90 days as IEA members.

South Korea has one of the best SPR models, Driscoll said. “What the Koreans have executed quite astutely in my opinion is that they have enticed overseas oil suppliers to store in their SPR.” The tiny country has a storage capacity of around 300 mb with nearly half coming from SPRs.  

Energy security is perhaps the most important feature of a nation that produces little oil but consumes a lot of it. In 1991, India had little foreign exchange available to import oil. That perhaps prompted former Prime Minister Atal Bihari Vajpayee to propose the SPR project in 1998, taking the lead from the IEA. Vajpayee also kick-started a plan to connect the country by highways under the Golden Quadrilateral project. But while roads continue to be laid rapidly, New Delhi has dragged its feet on SPR despite much lower costs.

In November 2018, India approved the filling up of Padur SPR by foreign oil companies under the PPP model to reduce budgetary support. The government has planned for another 48 mb of SPRs at Padur and Chandikhol at a cost of around Rs 100 billion but has delayed finding private sector partners to build them. New Delhi cites costs as an issue even as it earned Rs 8 trillion from taxes on petrol and diesel in the last three financial years. 

China has built around 500 mb 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. 

India’s priorities just seem to lie elsewhere — spending tens of thousands of crores on a new Parliament and offices in Delhi, highways for pilgrims in fragile Himalayan ranges or redevelopment of temples. Energy security is neither a voter catcher nor has enough appeal with the masses to be on that list.