Home » Vertical » Energy » Strategic Petroleum Reserves

Strategic Petroleum Reserves

Facebooktwitterredditlinkedin

You would recall that about 3 years back, price of petrol was increased by Rs. 2.50 per litre and price of LPG was increased by Rs. 50 per cylinder.  This was enough to observe Bharat Bandh.  However, in the same year, price of rice went up by Rs. 10 per kg and price of wheat went up by Rs. 8 per kg.  But, noticeable thing was that there was no Bharat Bandh for such rise in the prices of foodgrains.

This indicates the importance given to oil in our daily life.  Oil continues to be a dominant source of energy.  With a rising population, the expectations of the people for better quality of life are rising. The  middle class is moving up in value chain and demanding scooter, motor cycle, car,  AC, air travel etc.  Naturally, any increase in fuel price or disruption in oil supplies heavily impacts the daily life of the people. This shows how oil has emerged as one of the most sensitive product, which no Government can afford to ignore.

Most of us know, Maslow’s theory of hierarchy of needs. At the bottom is the need for food, shelter i.e. physiological need.  Once this is satisfied, man longs for safety and security.  Similarly, a nation has hierarchy of needs. The Government has to ensure that citizens of the country get the right to food. Food Security Bill was passed by the Government of India about 3 years back.  Now the most important step which everyone is looking forward to is the right to energy security.  Threats to energy security arise from  political instability  of countries like, Libya, Yemen, Syria, Iraq, Ukraine, Iran or Korea, extreme weather changes, financial upheavels,   attacks on supply infrastructure, as well as accidents and natural disasters. It is in this direction, Government of India has taken the first step this year with budgetary support.

 

Genesis

 

Let us look at the genesis of Strategic Petroleum Reserves (SPR).

The idea of SPR was first conceived in the USA as early as 1944.  However, the time for its fruition came in the background of 1973 Oil Embargo imposed by Arab nations in their conflict with Israel.  For the first time, they used oil as weapon to fight Israel and its allies.  The allies were essentially advanced nations fully dependent upon oil for their energy requirements.  In order to counter the effect of action taken by the body of oil exporters, i.e. Organization of Petroleum Exporting Countries (OPEC), these advanced nations, or should we say, oil consuming nations, formed an alliance which is known as International Energy Agency (IEA).  The idea of building up SPRs was generated by IEA.

 

Commercial Reserves Vs Strategic Reserves

Strategic Petroleum Reserves (SPR) refer to crude oil inventories held by the government of a particular country for the purpose of providing economic and national security during an energy crisis. These Strategic Reserves are different from commercial reserves.  The oil companies of each nation hold stock of different petroleum products in different depots and installations in order to meet the requirements of customers or dealers, closer to market place. This stock is purely to meet the commercial requirements.   However, Strategic Reserves are not meant for routine supply.  They are meant as a buffer in order to meet any exigency caused due to supply disruptions.     In order to reduce or minimize the degree of uncertainty in supplies, it is always better to build up some stock which need to be called as “Strategic Reserve” to be used only in case of national emergency.

 

Role of International Energy Agency

IEA, the organization of 28 oil consuming nations, with its headquarters in Paris, prescribed 90 days stock as “Strategic Reserves” to be held by its member-nations. The primary purpose of an IEA collective action is to mitigate the economic damage associated with a disruption of oil supply. By temporarily replacing disrupted supplies, the action is intended to help oil markets re-establish the supply/demand balance at a lower price level than would otherwise have been the case.

Drawdown was made from these reserves in exceptional cases, e.g. in the case of emergency due to Operation Desert Storm in Iraq in 1991. Another drawdown was made in 2005 when Hurricane Katrina devastated oil installations in USA.  The third drawdown was made in order to arrest the continuous rise in oil prices. IEA released 60 million barrels of oil from Strategic Reserves in order to bring down the prices from a peak of USD 125 per barrel in June 2011.  Therefore, the strategic reserves could be used for managing the prices to save the country from grave damage. 

Country

Oil Demand

Strategic Reserves

Mbpd

Million Barrels

USA

19.21

727

China

10.59

600

Japan

4.12

583

India

4.08

36

Canada

2.43

0

Korea

2.35

286

 

India’s Strategic Reserves

Visakhapatanam SPR Cavern  840 metres long, 20 metres wide and 30 metres high

india strategic reservesBeing one of the leaping tigers of Asia, India is fast emerging as a leading consumer of oil.  Next to USA, China and Japan, India is the fourth largest consumer of the world with oil demand of 4.08 million barrels per day.  Being a leading consuming nation, India too can become member of IEA, however, it will have to satisfy the condition of holding petroleum reserves equivalent to 90 days of imports.  The move of strategic reserves in Visakhapatnam, Mangalore and Padur with a capacity of 5.33 MMT in the first phase and Bikaner, Rajkot, Padur and Chandikhole, in the second phase, will take us to a formidable position to ensure energy security of the nation. The new reserves would have a combined capacity of around 12.5 million metric tonnes (MMT). The largest petro reserve was proposed to be set up in Odisha’s Chandikhole with an investment of Rs 3,800 crore. The details of first phase facilities are as follows.

Source: ISPRL website

Place

Capacity

Construction Cost

Million Barrels

Rs. In crores

USD Million

Visakhapatnam

7.55

1038

166

Mangalore

11.00

1227

197

Padur

18.37

1693

272

Total

36.92

3958

635

 

It would be interesting to compare the cost of construction of such facilities.  USA created strategic reserves of 727 million barrels with a cost of USD 5 billion.  These facilities were created during 1975. 

India created strategic reserves of 36.92 million barrels with a cost of USD 635 million. On an average the cost of construction per barrel basis works out to USD 6.88 per barrel in USA, whereas it amounted to USD 17.19 per barrel in India.  This may be due to time difference and number of other factors which may be analysed later on.

In order to ensure food security, Government of India had formed Food Corporation of India.  Similarly, in order to ensure energy security, Government of India has formed Indian Strategic Petroleum Reserves Limited as a special purpose vehicle with contribution from Oil Industry Development Board.

SPR storages, in line with global standards,  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.

As part of its contribution for acquisition of stock, Government of India, in its budget for the year 2015-16 has made a provisions of Rs. 2400 crores.  As a result of this move, the first parcel of  2  million barrel cargo of Iraqi crude is expected to commission Visakhapatnam SPR facility in this month.    This will be followed by  three Very Large Crude Carriers (VLCCs) to top up Vizag facilities. The remaining two SPRs at Padur and Mangalore, with a capacity of 29.3 million barrels are expected to be ready by October 2015.

Opportune Time to Fill up the Reserves

The price of crude oil has drastically come down in recent times from a peak of USD 115 in June 2014 to USD 45 in Jan 2015.  Presently, the prices are hovering around USD 65 per barrel.  The regime of low prices is the best time for filling up the SPRs.  The market outlook is full of bearish and bullish factors  as to how long the prices will remain abnormally low.  On the one hand, Saudi Arabia, continued crude reservesproduction at much higher level of 10 million barrels per day (mbpd) in order to keep up its market share and run its new refineries.  On the other hand, low prices  are causing a resurgence in global oil demand and causing number of oil rigs to go out of operations in  USA.  Having remained low for 3-4 months, there is predominant feeling that the price would be north bound shortly.  In view of this possibility, the right time for India is now to lock in the deals for procuring the crude for building up SPRs.

Financing the Reserves

The allocation of Rs. 2400 crores in the Union Budget will cover up a small part of SPR quantity, barely, it will be able to procure 6 million barrels. To finance the remaining cost of filling up the caverns, the government will have to  explore alternative funding models, including commercial utilisation by interested parties. The annual operations and maintenance costs of the reserve units are estimated to be Rs 47 crore in Vishakhapatnam and Rs 179 crore for all the three.

 Having created these facilities, oil has to be procured, stored and delivered for overall benefit of the nation. The question will come:  who will fund it.

  1. Due to lack of storage capacity in their own countries, the oil exporting countries look for SPRs in other countries to keep up the tempo of their production.   Due to shale boom in USA, oil exports from Gulf countries and West African countries have drastically come down.  This surplus has to be stored somewhere so as to ensure continuous production of oil from their  oilfields. Countries like China, Japan and Korea have given their SPR facilities to oil producing countries to store their surplus oil.  Similarly, India too can take cue from this practice and offer SPR facilities to the oil producing countries under forward commercial storage agreements. Whilst it gives a great relief to oil producer, it gives a great sense of security to the SPR country.  This will generate revenue for the country, at the same time, can be a great source of strength in times of emergency. The country can lend a helping hand to neighbouring countries or other friendly countries in meeting their oil demands, in times of national calamities or other emergencies. The country’s vulnerability to the onslaughts of supply disruptions will greatly come down.
  2. The second most important stake-holders in SPRs would be the oil companies.  Companies like HPCL, MRPL who will be in close vicinity to these SPRs will have an added advantage of accessing the reserves at a short notice with least amount of logistics difficulties.  The mechanism for withdrawal from SPRs for home consumption is beset with taxation problems.  SPRs being of national importance, need special tax dispensation so as to make the withdrawal for home consumption on par with imported oil without any imposition of sales tax, VAT or local levies.
  3. Apart from Government of India, foreign oil companies and domestic oil companies, the interested party in success of this idea would be the people of India.  As shrewd investors who have invested hundreds and thousands of rupees in Gold or fixed deposits, Indian investors can think of investing in SPRs bonds.  The investors may be encouraged to invest in Oil ETFs in the same as Gold ETFs.  The Government may give tax concession or exemptions for such investments or capital gains arising from purchase and sale of such instruments.

The move of creating SPRs is definitely a move in the right direction in creating a sense of security for the people of the country.  It is the duty of not only Government of India but also the duty of people of India to ensure the success of this facility.

 

Note: The writer is CMA KM Riyazuddin, Chief Finance Manager (Mumbai Refinery), Bharat Petroleum Corporation Limited.  These views are his own.

Facebooktwitterredditlinkedin

Other Links

Monthly Archive

Do follow us on

Facebooktwitterlinkedin

Find what you are looking for

Your Organization has a Customer Success Story?

Please send your authentic story in a crisply written format, supported by relevant graphics, tables etc. to STORY.

Are you a CEM Professional – a CEMPro?

As a CEMPro you can now share your Customer Management Success experience as per guidelines HERE and mail your experience to CEMPro