India’s Strategic Petroleum Reserve – when to tap the barrel?

India, which imports nearly 80 percent of its crude consumption, is in the process of creating its own strategic petroleum reserve to cater to potential supply disruptions. But this reserve will require good judgment of India’s leadership for its proper administration and must not become a tool for populism during election year, argues Rajeev Lala.

On 23 June 2011, US President Barack Obama authorized the tapping of the US Strategic Petroleum Reserve (SPR) to release 30 million barrels of crude oil into the world markets. The decision was part of a coordinated effort by the 28 member-states of the International Energy Agency (IEA) to compensate for loss of oil production due to the civil strife in Libya, a major oil exporter. It was only the third time in the history of the United States that the 700 million barrel reserve was tapped after the first Gulf War and Hurricane Katrina. The event was a reiteration of the continued preeminence of crude oil as a tool of geopolitical strategy.

India, which imports nearly 80 percent of its crude consumption, is also creating its own strategic petroleum reserve to cater to potential supply disruptions. Based on recommendations of the Planning Commission in the Integrated Energy Policy, the government set up the Indian Strategic Petroleum Reserves Ltd. (ISPRL), under the auspices of the Ministry of Petroleum and Natural Gas. ISPRL is constructing reserves with a capacity of 5 million tonnes of crude oil (36.7 million barrels) or about 10 days of consumption. Crude oil will be stored in underground rock caverns at three locations, one on the east coast at Vishakhapatnam (capacity: 1 million metric tonnes) and the other two on the west coast at Mangalore (2.5 million metric tonnes) and Padur (1.5 million metric tonnes). The projects are slated to be completed by 2012. The government plans to ramp up the strategic reserve to 90 days worth of oil consumption.

It is estimated that based on current price of about $110 per barrel, the facilities will contain $4 billion worth of crude oil. However, considering the financial, technical and logistical constraints to buying all the oil at the same time, the reserve will take shape only gradually. For example, the US SPR, which was set up in 1975, continued to buy oil from the market consistently for almost 20 years.

The International Energy Agency (IEA), founded in 1974, mandated that all its member states maintain a 90-day contingency oil reserve to prevent a repeat of the disruption caused by the Arab Oil Embargo of 1973-74. The 28 member-states of IEA jointly created a global strategic petroleum reserve which currently consists of about 4.2 billion barrels of oil in government and private industrial stockpiles. Considering that the world consumes nearly 88 million barrels per day, that number is not as big as it looks.

China too has plans in place to create a strategic reserve of about 500 million barrels by 2020. The program was launched in 2003 and is to be executed in three phases. The first phase was completed in 2008 with 102 million barrels stored in four coastal locations around Shanghai – Zhenhai, Daishan, Huangdao and Xingang. The second phase will focus on locations in the hinterland where 168 million barrels are planned to be stored at sites including Lanzhou.

Pakistan’s plans to create a strategic reserve remain hazy and with the country’s current energy crisis, it will remain very difficult for the country to have civilian, non-industrial reserves in place as a matter of strategy.

The case for a national SPR remains strong, albeit with riders. The Planning Commission envisaged three broad kinds of risks – supply risks, technical risks and market risks. ‘Supply risks’, as the term implies, would be any disruption of energy supplies at the producer level – for example, a war in the Middle East or a sudden shortfall in domestic oil production. ‘Technical risks’ imply a logistical or a technical disruption – breakdown of a major oil pipeline. Tapping the strategic reserve, in both these cases, is a clear-cut mandate. What remains unclear is the third kind of risk – ‘market risks’.

The US Energy Policy and Conservation Act (EPCA), 1975 governs the US SPR and defines the circumstances in which the SPR can be tapped. EPCA states that crude oil can be tapped in three ways – a ‘full drawdown’, a ‘limited drawdown’ and a ‘test sale or exchange’. The ‘drawdowns’ are authorized by the president depending on the severity and scope of the energy crisis. A ‘test sale/exchange’ is a technical maneuver that can be authorized by the Secretary of Energy to allow limited sale/distribution of oil of not more than 5 million barrels.

While the EPCA could be a model for India’s SPR, our biggest issue is that energy prices are highly regulated and the two main products of crude oil – petrol and diesel, remain highly taxed as well as subsidized. In an election year scenario, if the Indian economy faces ‘market risks’ and global oil prices double in, say, a month, the Indian leadership would have to show the maturity to deal with the temptation of nearly 37 million barrels filled in at a third of the spiked price.

President Obama was criticized for releasing US SPR crude while there was no perceptible tightening of global oil markets. It is widely believed that the decision was in response to high oil prices affecting the American economy. Delhi will need to show the discipline to keep oil in the caverns for a real contingency and its leaders must refrain from becoming commodity traders. While the goal of creating strategic petroleum reserves is laudable, it remains to be seen what emergency will be considered ‘strategic’.