Mint Explainer | India is building new strategic petroleum reserves: Here is why

India currently has SPRs totalling 5.33 mmt at Visakhapatnam (1.33 mmt), Mangaluru (1.5 mmt) and Padur (2.5 mmt) that were built by state-run Engineers India Ltd.

Expansion plans in phase II include a 4 mmt reserve at Chandikhol in Odisha. In addition, India plans to build new SPRs at six proposed locations to draw down on these emergency oil stocks during exigencies.

Mint takes a close look at what these SPRs entail and the challenges involved.

What are SPRs and their importance for India?

SPRs are typically built underground in rock and salt caverns, often near ports and refineries for easy access.

For India, SPRs are essential for national security and economic stability. As the world’s third-largest energy consumer, India imports about 85% of its crude oil and consumes approximately 5.5 million barrels per day (mbpd). This high dependency makes the country highly vulnerable to global oil supply disruptions.

The recent push to expand India’s SPR capacity is a direct response to rising geopolitical tensions. A recent 10-day conflict in West Asia, home to some of the world’s largest oil fields, exposed the fragility of global energy markets.

Additionally, recent military operations and the ongoing threat of future conflicts, as highlighted by “Operation Sindoor,” underscore the critical need for India to have significant emergency oil stocks. These reserves provide a vital buffer, allowing the nation to manage its energy needs during times of crisis and uncertainty.

What the commercial crude oil strategic storage at Padur entails

The commercial crude oil strategic storage at Padur will be developed by MEIL, which has been granted a 60-year lease for approximately 200 acres of land.

As part of the agreement, the government will assist MEIL in securing crucial approvals for crude oil transportation, including those related to the Coastal Regulation Zone (CRZ), the Petroleum and Explosives Safety Organisation (PESO), forest clearances, and a Single Point Mooring (SPM).

The government will also help with the Right-of-Way (ROW) and Right of Use (ROU) for the necessary pipeline.

To ensure the facility’s integration into the national energy infrastructure, state-run oil marketing companies like Indian Oil Corp., Hindustan Petroleum Corp. Ltd (HPCL), and Bharat Petroleum Corp. Ltd (BPCL) have been mandated to include Padur as an offtake point. In return for this support, the Indian government retains a critical right: the right of first refusal. This allows it to access the storage capacity during oil emergencies and procure crude oil at prevailing market rates.

As a concessionaire, MEIL will have significant commercial flexibility. The company can lease crude storage space to other entities and engage in trading activities. This contract structure allows MEIL to commercially utilize the storage and facilities by entering into agreements with third parties.

Why oil-producing partners are crucial for India’s SPRs

Building and maintaining SPRs is a capital-intensive undertaking.

According to industry estimates, the construction of a 1 million tonne reserve requires a capital expenditure of around ₹2,500 crore. However, beyond the initial building cost, the most significant expense involved in running an SPR is the cost of filling it with crude oil.

Given the inherent volatility of global oil markets, it is strategically important for India to partner with major oil producers. Such collaborations help mitigate the financial burden of filling these reserves. To date, the UAE’s Abu Dhabi National Oil Co. (Adnoc) is the only partner that has committed to India’s strategic crude oil reserve programme by leasing storage capacity.

The Indian government is actively seeking participation from more global energy majors, including the world’s largest oil producer, Saudi Arabian Oil Co., or Saudi Aramco. Expanding these partnerships is key to ensuring the country can effectively manage its emergency oil stocks without taking on the entire financial risk of filling them.

What are the recent triggers expediting India’s SPR programme?

Recent geopolitical events have served as key catalysts for India to fast-track its SPR programme.

A prime example is the West Asia conflict, during which Iran threatened to close the Strait of Hormuz. This vital maritime “choke point” is a critical artery for global oil trade, with a fifth of the world’s oil cargoes passing through it.

For India, a country that consumes 5.5 million barrels of crude oil per day (mbpd), this threat was particularly alarming as 1.5-2 mbpd of its crude oil imports pass through the strait, highlighting the country’s energy vulnerabilities and the urgent need for robust reserves.

Furthermore, “Operation Sindoor” has also prompted India to double down on its efforts to address energy security challenges.

“The recent geopolitical events only accentuate the need for more such SPRs from the standpoint of energy security. Strategic crude reserves are an important asset, acting as a buffer against global supply disruptions, geopolitical instability, and sudden price shocks,” said Sanjay Sah, leader energy and chemicals (South Asia) at Deloitte who advised ISPRL, and headed the team that ran the bid process for India’s first commercial crude oil strategic storage at Padur.

“Given the private sector involvement, this is also a good way of not locking in the government’ money. We have been associated with the process since 2021 and have looked at models globally. This success will result in more such projects,” Sah added.

The agency responsible for India’s SPR programme

Indian Strategic Petroleum Reserves Ltd (ISPRL), a state-run agency, is responsible for managing the country’s SPR programme. The agency has successfully built the first phase of India’s reserves and has since evolved the modes of construction and operations. A key shift occurred in July 2021 when the Union Cabinet approved a commercialization mandate, allowing ISPRL to rent out up to 30% of its SPR capacity and use 20% for trading purposes.

Following this mandate, ISPRL is actively seeking a strategic partner for trading crude oil from its reserves, inviting global expressions of interest to do so. Domestically, it has already leased a capacity of 300,000 metric tonnes to HPCL for three years at the Visakhapatnam SPR. In a further move to monetize the reserves, state-run Mangalore Refinery and Petrochemicals Ltd (MRPL) also signed a deal in January to store its crude oil in ISPRL’s caverns.

Beyond its domestic commercial role, ISPRL has demonstrated its strategic importance on the global stage. In November 2021, India agreed to release 5 million barrels from its reserves to help cool global crude oil prices, coordinating the move with other major oil consumers including the US, China, Japan, and South Korea.

This international collaboration followed a significant financial success in 2020, when India strategically bought oil at just $19 a barrel to fill its reserves, saving the nation a substantial $685.11 million.

India’s current oil reserves and their adequacy

India’s current Strategic Petroleum Reserve (SPR) capacity of 5.3 mmt is only enough to meet the nation’s oil needs for 9.5 days. However, India’s total emergency reserves, which include both the SPRs and the stocks maintained by state-run oil companies, are equivalent to 77 days of net imports. This is still short of the 90-day minimum that member nations of the International Energy Agency (IEA) are required to maintain.

India, which joined the IEA as an association country in 2017, has been working toward full membership. It sent a formal request for full membership in October 2023, and the IEA announced it would begin talks on the matter in February last year.

The way ahead

To bridge this gap, India is doubling down on its efforts to build new SPRs at six proposed locations. The government has tasked state-run Engineers India Ltd (EIL) with preparing Detailed Feasibility Reports (DFRs) for these new reserves, which are expected by the end of the year.

These plans include a new reserve at the Mangalore Special Economic Zone in Karnataka and another at salt caverns in Rajasthan’s Bikaner, as reported by Mint.