Oil Reserves

Oil Reserves

Mains-GS-3-Economic Development

The sharp fall in the price of oil is an opportunity to increase Strategic Petroleum Reserves (SPR) stockpile and achieve energy security.

What is the current scenario?

Negative Oil prices

1. Oil prices continue to decline globally as global demands are too low.

2. For the first time, a negative price has been registered for a major global crude oil benchmark- West Texas Intermediate (WTI) sweet crude oil.

3. This signals the severe disruption of the global oil markets and points to few oil storages to stock the global excess.

India’s scenario

1. While Brent Crude Oil is India’s basket, WTI is not. But Brent Crude Oil has also traded at low price.

2. The economic consequences of COVID-19 are going to be drastic for India and the world.

3. Even as India suffers from a lockdown, the price of oil is a way for future recovery and reconstruction.

4. It is a positive development for India’s growth aspirations and a lack of self-sustaining oil production.

5. Reduced oil prices would result in surplus for the consumers and a fiscal bonus for the government through increased tax collections.

Why do we need SPR stockpile?

1. India should strengthen its energy security by buying oil and filling up Strategic Petroleum Reserves (SPR).

2. India was the third-largest consumer of energy in the world, as well as the third-largest importer of oil in 2018. India is particularly vulnerable to oil price fluctuations.

3. This reduction in oil prices offers an opportunity to fill up the reserves in an extremely cost-effective way.

Existing capacity

1. Currently, India maintains an emergency stockpile of oil reserves. Under the existing Strategic Petroleum Reserves programme, India has 87 days of reserves.

2. Out of this, refiners maintain 65 days of oil storage and the rest of the reserves are held in underground salt caverns maintained by Indian Strategic Petroleum Reserves Limited (ISPRL).

3. The existing and planned capacity for the underground reserves is 10 and 12 days of import cover for crude oil respectively.

Which are the issues?

1. Capacity does not directly translate into utilization as oil is an expensive commodity most days of the year. Of the existing 10 days of capacity, only about 50% is utilized.

2. Though most of the refineries holding stock are publicly-owned companies, the SPR arrangement between the oil refineries and the Union or state governments is not specified well.

3. Information on the breakdown of refineries holding SPR and form (crude or refined) or locations are not publicly available. This lack of transparency is furthered by the ambiguity over the mobilization process.

Where do we need to focus?

1. Introduce transparency and accountability in relation to the SPR.

2. The procedures, protocols and facts about Indian SPR storage require greater public and parliamentary scrutiny similar to other strategic reserves like foreign exchange.

3. As the SPR reserves are meant to be used in emergencies, it requires

a. Laying out of designated roles for different agencies for efficient SPR mobilization process to avoid redundancies.

b. Role and process clarity regarding SPR mobilization like the authority or agency to define an emergency and to order a mobilization.

4. India should look to diversify its SPR holdings. Diversification can be based on geographical location (storing oil either domestically or abroad), storage location (underground or overground) and product type (oil can be held in either crude or refined form).

a. Storage and transportation costs could be saved by diversifying geographically. For instance operationalize, modernize, and add to the oil tanking facilities at Trincomalee in Sri Lanka.

b. Enter into a strategic partnership with Oman (Ras Markaz) for oil storage that could also help India avoid the potential bottleneck of the straits of Hormuz.

c. Diversification could also be in the form of ownership — either publicly owned through ISPRL or by private oil companies, such as ADNOC of Abu Dhabi, that could fill up the SPR

when prices are low and take advantage of price arbitrage.

d. This could achieve a degree of price stability and reduce the cost for India to buy such large quantities of oil.

5. ISPRL should consider filling up the SPR reserves whenever the price of Brent crude oil falls below a certain price.

6. Buying crude on the forward market is also an option. But oil prices are in “contango” meaning contrary to normal times, future prices are higher than spot prices.

Source: The Hindu

Author:

Facebook Comment