10. OIL

Security of supply

Emergency response policy and strategic stocks

India officially decided to establish a strategic petroleum reserve in January 2004. In June 2004 the Indian Strategic Petroleum Reserves Limited (ISPRL) was formed as a wholly owned subsidiary of the Oil Industry Development Board (OIDB) under the MoPNG, to implement and manage proposed reserve projects. The entire SPR volumes are expected to be in the form of crude oil.

In 2005 India’s Integrated Energy Policy recommended creating emergency oil stocks equivalent to 90 days of oil imports (Planning Commission, 2005). In 2008, the GoI approved the construction of rock caverns as Phase I of India’s strategic petroleum reserve scheme, with a total capacity of up to of 5.33 Mt (around 40 mb) in three locations – Vishkhapatnam (1.3 Mt), Mangalore (1.5 Mt), and Padur (2.5 Mt). In 2008 the amount proposed was equivalent to 18 days of net oil imports (2.2 mb/d), but as of 2019 the reserves foreseen under Phase I are estimated to supply approximately 9.2 days of India’s crude requirement, according to the consumption pattern of 2018/19. The construction of all three sites was completed by 2018 and currently the caverns are in the process of being filled.

In December 2011 the Secretary of the MoPNG stated that the GoI was planning to significantly expand the stockpile by building additional storage capacity as Phase II of the project. In October 2018, after a detailed feasibility study conducted by ISPRL, the GoI has given in-principle approval for Phase II of the SPR programme. The SPR reserves are proposed for construction with a capacity of 29.2 mb (4 Mt) at Chandikhol in Odisha and 18.25 mb (2.5 Mt) at Padur in Karnataka. The construction and filling of the reserves are being explored under a public–private partnership (PPP) model, with a tender for building the second-phase stocks to be opened by end of 2020. If fully filled, this second phase would add another 11.2 days of net imports, based on the 2018/19 consumption pattern. However, as India’s net import volume is expected to more than double by 2040, the number of days covered is likely to further decrease. India envisages international co-operation with IEA countries on global experience on stockholding mechanisms and emergency response, including the United States, for Phase II of its SPR programme (see Box 10.2)

Box 10.2 The IEA oil stockholding mechanisms

In accordance with the International Energy Programme, all IEA member countries are required to hold emergency oil stocks equivalent to at least 90 days of their net imports. This basic oil stockholding obligation of IEA member countries was first formulated in 1974 to establish a “common emergency self-sufficiency in oil supplies”. This commitment can be met through stocks held exclusively for emergency purposes and stocks held for commercial or operational use, including stocks held at refineries, port facilities and in tankers in ports.

Stockholding regimes vary among IEA member countries, reflecting differences in oil market structure, geography and national policy choices related to emergency response.

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10. OIL

In general, there are three approaches to ensuring that overall stock levels meet minimum requirements: government stocks, agency stocks (where a stockholding arrangement involves the establishment of a separate agency endowed with the responsibility of maintaining all or part of the stock obligation) and obligated industry stocks (placing minimum stockholding obligations on companies in domestic oil markets). Some countries use only one category of these, whereas most countries use a combination of categories to meet the minimum obligation.

The IEA stockholding obligation does not specify whether stocks should be held in the form of crude or refined oil. The most appropriate choice between holding reserves in either crude or oil products depends on factors in each country. Countries with a large refining industry are likely to hold more crude oil, which provides greater flexibility in times of crisis. In countries that have limited domestic refining capacity or rely on product imports to meet a large share of domestic demand, there is a greater tendency to hold reserves of refined products.

Emergency oil stocks are a powerful policy tool for mitigating short-term physical supply disruptions and providing liquidity to allow market recovery. Their use in a disruption provides economic benefits by enabling oil supply to be restored while dampening oil price spikes and avoiding substantial import costs and GDP losses. A 2018 IEA study, The Costs and Benefits of Emergency Stockholding (IEA, 2018b) shows the substantial overall benefits of holding emergency oil stocks in comparison to the costs associated with building and maintaining these stocks.

In 2018, together with the known commercial stocks stored at refineries, total oil stocks in India are currently estimated to be around 175 mb, which is equivalent to 46 days (2018 number) of their net imports. They are composed of the crude oil from the strategic reserves (20 mb), commercial stocks at public refineries (91.7 mb [51.7 mb crude and 40 mb products]), and commercial stocks at private refineries (63 mb [estimated by combined refinery capacity of 2.1 mb/d and 30 days’ cover, 15 days each for crude and products]).

For the purpose of a joint stockpiling project, India is co-operating with ADNOC to store crude oil at the strategic reserve sites. According to the agreement, the entire amount of oil stored by ADNOC would be made available to India in case of an emergency; but in normal times, ADNOC can trade a part of the crude oil with Indian refineries on a commercial basis, while a mutually agreed minimum crude storage for emergency purposes should be kept. In January 2017 ISPRL and ADNOC signed a contract to store 5.86 mb of ADNOC crude oil at the strategic reserve site in Mangalore. In November 2018 a second joint stockpiling contract was signed with ADNOC to store 9.2 mb of oil at the strategic reserve site in Padur. The GoI created a state-led committee, chaired by the Secretary of the MoPNG, to make decisions on the release and replenishment of oil from strategic reserves.

India does not place an obligation on its industry to hold a certain amount of stocks.

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