The Echo-nomist

This story is one about the (sort of) privatisation of India’s Petroleum Reserves.

In the 1970s, the world found itself in the middle of an energy crisis. It was a time when oil was the lifeblood of modern industry and transportation, and became a weapon in geopolitical conflicts. There was a war with Israel on one side and a coalition of Arab states led by Egypt and Syria. Arab members of the OPEC (organisation of petroleum exporting countries), the leading oil-producing companies, stopped exporting petroleum to them. Since the US was on Israeli military’s side, they were on the receiving end of the oil sanctions. As a result, oil prices skyrocketed as much as 130% and supply disruptions threatened to bring the economy to its knees (source: finshots). This episode served as a reminder of the vulnerability of relying too heavily on foreign oil.

They took their time to lift the sanctions but the rest of the countries, left in oil shock, were forced to think of a solution. Just like the UN was formed after world war II to maintain international peace and security, Western Europe and the US came together to form the International Energy Exchange (IEA) to counter OPEC’s dominance. And so SPRs were born. They would do so by storing Strategic Petroleum Reserves (SPRs) which they could use during crises like this. This was supplemented by an oil-sharing agreement which would decide how to split this energy stock whenever needed. It acted as a security blanket, providing reassurance to policymakers and the public alike. The Middle East no longer had monopoly over the price and the rest of the world would have some power to fend off high prices, or at least a sudden hike in prices.

Coming to India, it’s a country heavily reliant on crude oil. They are the world’s third-biggest oil importer and consumer and import over 80% of their oil needs (source: Mint). That’s why this is an issue particularly relevant to a country like India. They have been actively working on establishing their Strategic Petroleum Reserves (SPRs) to enhance energy security.

India’s SPR program began with the construction of underground storage facilities at three locations: Vishakhapatnam, Mangalore, and Padur. These storage facilities are intended to hold millionss of barrels of crude oil and are managed by a government entity called ISPRL (Indian Strategic Petroleum Reserves Limited). The government bore all the costs for building and maintaining these reserves. While the cost incurred to build it is a one time cost, refilling the crude oil in these reserves is an expensive task.

In some cases, the cost to maintain and refill these reserves is actually more than the benefits the country obtains from releasing oil from SPR when required. This was talked about in a report, where they explained that SPRs only help in maintaining the price and avoiding shocks if deployed at the onset of an oil supply disruption. If companies get greedy or think it’s too early, the prices could keep rising making it too late for SPRs to provide any substaintial help. America’s SPR is a good example of this. They have the biggest reserve in the world with a capacity of 714 million barrels of oil (almost a week’s worth of global oil production) (source: ifp). However, their releases haven’t helped significantly in stabilising oil prices in times of supply crisis. Post covid, in 2021, the oil prices touched a seven-year peak, forcing US to release 50 million barrels of crude oil from their reserves. But oil prices still rose by $1 per barrel.

This raises the question: is the cost of maintaining it is actually worth the benefits?

The world has also become better equipped to handle disruptions relating to oil. There’s only a 24% chance of an oil supply shock in any given year. Even though the Russia-Ukraine war was a shock to the oil industry, India was sent huge quantities of oil at a discount, through modified routes. Furher, the attempt to shift to renewable sources of energy has reduced dependence on fossil fuels, more so in developed countries.

But the case is slightly different for India. Since they are so largely dependent on oil for various needs and most of the oil is imported, India needs to expand their SPR. They can’t always ride on bigger economies’ SPRs, and instead need to share the burden of holding SPR reserves.

And so India decided to build its first privately managed SPR by FY30. To prevent bearing the huge costs associated with maintaining reserves, they decided to lease them. Currently, India’s SPRs are owned entire by the government or through a public-private partnership. The governments idea is to utilize its Strategic Petroleum Reserves (SPRs) more effectively by leasing out a portion of the storage space to private oil companies. In doing so, the companies would refill and maintain the reserves and bear the cost of it. At the same time, the government will have priority access to the stored oil during an oil supply crisis. Meanwhile, the government could generate revenue through rent and alleviate the burden of maintenance and refilling costs.

Private entities taking storage on lease will be allowed to re-export 1.5 million tonnes of oil stored in the caverns in the case of Indian companies refusing to buy the crude. Moreover, Indian Strategic Petroleum Reserves Ltd, a company charged with building of SPRs, will be allowed to sell 1 million tonnes of crude to local buyers. The cabinet also decided to provide up to ₹80 billion of financial support, equivalent to about 60% of the estimated cost, for building two new SPRs.

It sounds like a win-win but we’ll have to see the plan in action to know for sure.