With Brent, the global oil benchmark, plunging to a two-decade low, expectations have risen in India that lower oil prices would cushion the country’s current account deficit and help cool inflation.
A nearly month-long countrywide lockdown to contain the covid-19 pandemic has crimped demand for fuel products in India, the world’s third-largest oil importer.
This has saddled refiners with unsold stocks at their depots as well as fuel retailing outlets.
And with bare minimum off take, refineries are now operating at 40-50% of their capacities.
“Our refineries are not running at full capacity, so we decided to divert crude and instead fill up our crude caverns. But that too is limited and will be completed by May," said a senior official from an oil marketing company. “Had we created more storage capacity, we could have taken full advantage of these historically low crude oil prices," the official said on condition of anonymity.
Last week, India began filling its three strategic petroleum reserves (SPRs).
And by the end of next month, the country would have moved about 19 million barrels of oil into these reserves located in southern India—Visakhapatnam (1.33 million tonnes) Mangaluru (1.5mt) and Padur, Karnataka, (2.5mt).
India’s crude imports averaged around 4.5 million barrels per day in 2019. Even after filling up the reserves, India would have secured for itself only nine days of emergency fuel supplies at 5.33mt.
Refiners and industry experts say the lack of storage capacity is an opportunity lost for the country at a time when fuel prices are at historic lows.
“Had we created more space to store crude, we would have secured supplies like our Asian peers," said an energy consultant. He spoke on the condition of anonymity as he is not allowed to speak to the media.
India’s Asian peers China and Japan are way ahead in creating crude storage capacity.
While India has a storage capacity of 39 million barrels, China’s total capacity is at 550 million barrels and Japan’s at 528 million barrels, ensuring a supply of over 190 days in the event of a supply disruption.
Though India approved construction of two new caverns in 2018, as part of its phase two expansion, in Chandikhol in Odisha (4mt) and Padur II in Karnataka (2.5mt), work is yet to commence on these projects.
While building these caverns has a budgeted cost of around ₹15,000 crore (as of 2018), filling them would cost at least an additional ₹20,000 crore.
Debasish Mishra, partner at Deloitte Touche Tohmatsu India Pvt. Ltd, said however, that by the time these caverns become operational, there may be a big question mark on their relevance.
“The proposed strategic petroleum reserves (SPRs) may take 5 to 7 years to come up, by then the global energy scenario and their relevance might have changed completely," said Mishra.
He said going forward, it is expected that energy demand would gradually shift towards electric vehicles (EVs), and demand for oil will peak and start coming down in two decades. “All these factors need to be considered while planning for more SPRs," he said.
Though the Indian Strategic Petroleum Reserves Ltd (ISPRL), which is responsible for building and filling of SPR sites, is exploring a public private partnership model with prospective partners such as financial investors, traders, or sovereign wealth funds, there is no revenue model to justify investment by the private sector, raising questions on the viability of the model, said the energy consultant.