India’s decision to expand the size of Strategic Petroleum Reserve (SPR) to 87 days’ worth of the country’s net crude oil imports by 2020 is being debated by critiques.
The Government of India is setting Strategic petroleum reserves, which are essentially huge stockpiles of crude oil that would serve as a cushion during any external supply disruptions. What are Strategic Petroleum Reserves?
- These strategic storages would be in addition to the existing storages of crude oil and petroleum products with the oil companies.
- In India, these are being constructed near the coastal regions in underground rock caverns (as they are considered the safest means of storing hydrocarbons).
- Crude oil from these caverns can be supplied to the Refineries either through pipelines or through a combination of pipelines and ships.
- The concept of SPRs were introduced by the International Energy Agency (IEA) in the aftermath of the 1973 oil shock when Arab countries drastically cut production of oil.
- Subsequently, many major global oil consumers such as the US, China and Japan have built massive strategic reserves of oil over the years.
- ISPRL has constructed three strategic petroleum reserves at Visakhapatnam on the East Coast, and at Mangaluru and Padur (near Udupi) on the West Coast. These facilities, with total capacity of 5.33 million tonnes, can meet 10 days of India’s crude oil requirements.
- In July 2018, the government approved the construction of two more reserves at Chandikhol in Odisha and Padur in Karnataka, having an aggregate capacity of 6.5 million tonnes. The new facilities can provide additional supply for about 12 days.
- This year only, the Government of India also announced that it would increase the size of the SPR to 87 days’ worth of the country’s net crude oil imports by 2020.
- Globally, there are no perceived shortages envisaged in oil supplies (as there is plenty of oil in the global market), at least in the foreseeable future.
- Also, any supply disruption due to any conflict, would not last longer.
- Constructing SPRs involves huge capital investment, estimated at Rs. 4098.35 crore for the three original SPR sites alone.
- Infact, S. has been debating about reducing its strategic stockpile to half, driven by the shale revolution and the country’s dramatic resurgence as a net oil exporter.
Reasons for enlarging the Indian SPR?
- Supply crisis: Notwithstanding the current adequate supply condition, there is little certainty in oil markets. There is a perception that a period of plenty could be followed by a supply crisis. Also, the longevity of shale production is also not certain over the long term.
- Price volatility: The issue is not just about availability of oil, but about ‘affordable oil’. g. the world recently witnessed oil price spike due to geo-political standoff (e.g. Iranian sanctions). An expanded SPR would provide some relief from price hikes.
- Production manipulation: Price volatility has become a regular feature due to production manipulation by oil producers to protect their market share. E.g. in December 2016 OPEC and non-OPEC producers agreed to curtail production so as to shore up prices.
- India’s Oil Dependence: Years of stagnating domestic production and the rising demand for crude (82% of which is imported) is continuously increasing India’s crude oil import bill.
- Energy diplomacy: An enlarged SPR can be a key component of India’s energy diplomacy.
- Countries which cannot afford to maintain SPRs could purchase crude from India in the event of a disruption, which, in turn, could strengthen bilateral relations.
- India can also provide joint stockpiling opportunities to even producers.g. under an agreement with the UAE’s ADNOC, Two-thirds of the volume at SPR, Mangalore would be available for India, and ADNOC could store the remaining volumes.
- With India now an associate member of the IEA, it could coordinate with the Agency in times of supply shortages as well as manage demand.
- Global Scenario: The global practice is to maintain strategic reserves of at least 90 days of oil imports. Thus, India is on the right path.
In short, Strategic petroleum reserves add a necessary layer to India’s energy security.