India’s Strategic Oil Reserves: Costs and Benefits



This article is part of the series Comprehensive Energy Monitor: India and the World


Fund

On November 23, 2021, the US administration authorized the release of 50 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) operated by the US Department of Energy (DOE). 50 million barrels of oil is about half of global oil consumption per day and about three days of US oil consumption. Oil prices had reached levels not seen in seven years, which prompted the United States’ decision to release SPR crude oil. In the words of Secretary DOE, the release of SPR Petroleum underscored the US President’s commitment to using available tools to cut costs for working families (by reducing the retail price of gasoline in the United States). United) and pursue the economic recovery. The decision to release SPR oil by the United States has been coordinated with parallel decisions in China, India, Japan, South Korea and the United Kingdom. India’s share in the coordinated release of oil stored in the SPRs was 5 million barrels, one tenth of the US SPR release, which is not enough to influence oil prices as the world consumes 100 million barrels per day (b / d).

The SPR oil release target was not met as oil prices edged up US $ 1 / bbl (b) after the SPR release was announced. But when news of a new variant of COVID-19 in South Africa broke on November 26, 2021, it did what the Biden administration’s publication of the SPR could not – lower the prices of the drug. oil and that too by a significant 10%. This implies that the expectations of oil demand growth influenced by factors such as the pandemic are more important in the evolution of oil prices than the expectations of supply corrections such as the release of oil by the SPR. The apparent powerlessness of the SPR version raises questions about the costs and benefits of maintaining SPRs.

India’s share in the coordinated release of oil stored in the SPRs was 5 million barrels, one tenth of the US SPR release, which is not enough to influence oil prices as the world consumes 100 million barrels per day (b / d).

Indian Strategic Petroleum Reserves Limited

The Indian SPR is managed by the state-controlled Indian Strategic Petroleum Reserves Limited (ISPRL), which was established in 2004 as a wholly-owned subsidiary of Indian Oil, then transferred to the Oil Industry Development Board (OIDB) in 2006. Under phase I, ISPRL established oil storage facilities with a total capacity of 5.33 million tonnes (MT) at 3 sites: (i) Vishakhapatnam (1.33 MT), (ii) Mangaluru (1.5 MT) and (iii) Padur (2.5 MT), which were filled with crude oil. This will be enough to meet nine and a half days of India’s crude demand. In July 2021, the government approved the creation of two additional commercial and strategic facilities with a total storage capacity of 6.5 MT of underground storage at Chandikhol (4 MT) and Padur (2.5 MT) in public partnership mode. -private (PPP) within the framework of phase II of the SPR Program. When Phase II is completed, it will meet an additional 12 days of India’s crude needs.

The capital cost for the construction of the SPR facilities (phase I) was initially estimated at INR 23.97 billion at September 2005 prices. The revised cost estimate for the three sites is D 40.98 billion. ‘INR. Most of the capital cost was financed from funds available from the OIDB, while Hindustan Petroleum Corporation Limited (HPCL) covered the cost of the 0.3 MT compartment at Visakhapatnam. The costs of operating and maintaining strategic reserves are borne by the Indian government. During the year 2019-2020, ISPRL recorded a net loss of more than one billion INR.

Origin and justification of SPRs

The spectacular increase in the price of oil at the end of the 1970s redefined the energy policies of industrialized countries, moving from a policy of abundance to a policy of scarcity. Western European countries, with the exception of France, and the United States reached an agreement to create the International Energy Agency (IEA) in 1974 to counter the actions of OPEC (Producing Countries and oil exporters). France and the United States joined the IEA later. Although Henry Kissinger, who coordinated the international response to the oil crisis, had ambitious plans for the IEA, it ultimately became a modest scarcity management mechanism through an oil-sharing agreement between the member countries that required the maintenance of strategic oil stocks to mitigate the supply risk. All IEA oil importing member countries are required to hold emergency oil stocks equivalent to at least 90 days of net oil imports. The industrialized countries represented by the IEA have pushed China and India to build and maintain strategic oil stocks to deal with short-term volume and price risks. Increases in the price of crude oil are generally the result of an actual or projected increase in demand or a decrease in supply, or both. The logic is that the release of SPR oil would potentially provide temporary relief from rising prices, but more importantly would compensate for the temporary supply losses that are causing the price increase.

All IEA oil importing member countries are required to hold emergency oil stocks equivalent to at least 90 days of net oil imports.

Problems

Although strategic oil storage has been promoted by policymakers as the best way to guard against supply shocks, questions remain as to whether the high cost of maintaining these stocks justified the benefits, especially for developing economies. Theoretically, the release of SPR oil by wealthy industrialized countries to influence crude oil prices provides a global public good of lower oil prices. No country can be excluded from the drop in prices that is expected following the release of SPR oil, and therefore, it is possible for poor countries to profit from the SPRs held by industrialized countries. But industrialized countries have pressured India and China, now major oil importers, to share the burden of holding SPR reserves. Most studies estimate that the opportunity cost of owning crude oil is greater than the cost of crude oil. To reduce this cost, it is suggested to auction or exchange oil in SPR.

No country can be excluded from the expected price drops following the release of SPR oil, and therefore, it is possible for poor countries to take advantage of SPRs held by industrialized countries.

India started selling crude from its SPR five months ago in July 2021, following news of China’s decision to auction crude from its SPR. India’s goal was to market the SPR crude reserves to generate income using oil stocks for trade and from licensing capacity. The logic behind this is to buy crude at lower levels and source in the domestic market when prices rise significantly. For example, China’s SPR crude which was purchased in April-May 2020 when oil prices were around US $ 40 / b was auctioned on September 24, 2021 at US $ 65-$ 70 / b, which helped improve refining margins for crude buyers and also improved the state’s finances. . ISPRL has leased capacity from the UAE’s ADNOC (Abu Dhabi National Oil Company) to hold 750,000 tonnes of crude under a government-to-government agreement. ISPRL plans to lease an additional 30% capacity to international investors with the possibility of exporting crude.

Overall, the SPR is like an insurance policy against future oil or price shocks. The premium is the cost of maintaining the SPR. The question is whether the premium is justified. The strategic importance of petroleum has declined dramatically partly because of the abundant availability of petroleum resources and partly because of the negative perception of petroleum and other fossil fuels as sources of carbon emissions. Oil supply shocks have not only become rarer, but also short-lived. The advantage of the SPR version in influencing the price is probably overestimated, as the more recent version of SPR illustrates. Maintaining SPR may be warranted under current circumstances, as oil continues to support almost all other energy sources, including renewables (in the manufacture and transportation of renewable energy equipment) . But in the future, the value of the oil storage insurance premium may need to be reassessed.

Source: BP 2021 statistical review for oil price, EIA, Energy Information & Administration, USA for US SPR capacity

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