By R. Sasankan

The war in Ukraine and the sudden but brief disruption in crude oil supplies that followed appear to have coalesced into a strong justification for beefing up India’s strategic crude oil storage capacity. The proposal to ramp up capacity in the strategic crude caverns was floated long before the latest crisis erupted and has been a hotly debated issue with energy experts split equally on the issue.

Is the latest wobble in crude oil markets justification enough to build fresh strategic storage capacity at considerable expense?

Initially, the strategic crude reserve was created in underground caverns at three places in the southern states of Karnataka and Andhra Pradesh with a total capacity of 5.33 million tonnes. The government has now cleared plans to expand the capacity by 6.5 million tonnes with the creation of an additional storage reserve in the state of Odisha. Since this is going to be an expensive proposition, the expansion project is proposed to be created through public-private participation. It isn’t going to be easy to find private partners who will be ready to stump up the funds, which is why there is growing talk that the money may eventually have to come out of the government’s Oil Industry Development Fund.

India’s experience with crude storage capacity has been pretty sketchy. For close to a year, the initial capacity of 5.33 million tonnes remained unfilled. Finally, Saudi Aramco and ADNOC bailed the government out by hiring a portion of the capacity. Subsequently, PSU oil refineries have been persuaded to store their crude in these caverns to ensure that they do not remain idle. The facility is being managed by a special purpose vehicle called Indian Strategic Petroleum Reserve Ltd (ISPRL). The decision to create the new storage capacity in Odisha was driven by Dharmendra Pradhan when he headed the ministry of petroleum and natural gas.

The concept of a strategic crude storage gained acceptance after the Second World War. Several countries alone or as a group have built strategic petroleum reserves. It entails a cost which is often passed on to the final consumer, either directly or indirectly. There has been intense debate on the need to create such capacity in the first place – and also label it as a “strategic” reserve. The term connotes that this is a vital reserve that nations can dip into during moments of extreme crisis like external threat. History, however, shows that the world’s shipping lanes have never been closed for more than seven days. There has also not been a single instance where a nation has been forced to use its strategic reserves because of an external threat. Consequently, each country must carefully weigh the burden of costs against energy security concerns arising from perceived or real disruptions in oil supplies.

The US and Europe carry large petroleum security reserves but have primarily used them to address short-term price volatility in an effort to stabilize product prices paid by the consumers. The war in Ukraine is the most recent instance where the oil reserves have come in handy to quell the volatility in prices.

India’s security concerns stem mainly from the threat that Pakistan poses. The two countries have gone to war four times since 1947. Hostilities have escalated into several skirmishes but never sufficiently enough to threaten a complete disruption in oil supplies. The perceived view is that Pakistan cannot sustain a war for more than two weeks. Put that in perspective: India has an oil storage capacity that is sufficient to meet two month’s requirements.

Such stocks exist all along the value chain: production/import facilities, pipelines/tankers, crude and product storage at refineries, product depots along the distribution network, tanks at retail outlets, and any pipelines or bowsers serving the retail network. In addition, most countries typically carry some strategic product stocks to meet their internal and external security threats. Moreover, the different wings of Indian defence forces have their own stocks in adequate quantities.

It is against this background that I am questioning the wisdom of expanding the strategic crude storage, which is going to be an expensive affair. If crude storage was a profitable business, large business houses like Reliance and the Adani group would have entered the arena by now. They are aware that crude oil once stored has to be replaced periodically to retain its quality, which can be ruinously expensive.

Having said all this, let us also recognise that the leading Middle East oil producers such as Saudi Arabia, UAE and Kuwait have a strategic purpose to create crude storage facilities. There is a close parallel here to the raging debate in India over the location of data servers that support cloud computing operations especially in the area of financial transactions. One must consider whether the creation of such storage facilities for crude oil should be sucked into a similar controversy. One must consider if such reserves are safer within one's own borders or provide greater security, during prolonged wars or against acts of sabotage if located outside one's territorial jurisdiction. At the same time, principal suppliers of crude -- whose economies depend primarily on oil revenues -- also have security concerns over the crude caverns they create.

Saudi Arabia and other Middle Eastern countries use the sensitive Persian Gulf for most of their crude and product shipments to the rest of the World, primarily Asia. One view is that they might be ready to consider the prospect of creating strategic oil reserves outside their own borders given the fact that 55 per cent of globally traded crude goes to Asia.

This is where we can meld compulsion and convenience to create mutually beneficial outcomes for India and its friends in the Middle East. Will India consider offering countries like Saudi Arabia and its neighbours the opportunity to invest in the strategic crude storage reserves located here? Would those nations see the virtue of making such an investment? If they grabbed the offer, India could earn a stream of revenue through lease rents, gain access to a reserve to meet her own strategic needs, and potentially lower the stocks that the country is carrying along her own petroleum value chain. The biggest attraction is that such a reserve -- owned by the oil producing countries -- would ensure uninterrupted flow of Middle Eastern crudes to Asia and other destinations to address short-term disruptions.