Building a 'Strategic Oil Reserve' for India

After years of conceiving the idea of Strategic Oil Reserve, the Indian government seems to be moving in the right direction in a resolute manner. Recent statements by both the Prime Minister and the Petroleum Minister about building strategic storage facilities to gear up the country to meet oil emergencies in the future contribute towards actualizing the vision of ensuring energy security for the country.

Why is Strategic Oil Reserve important for a country? Strategic Oil Reserve gains its importance due to two reasons:

1. it caters to the energy requirements of the country in the event of a war or when the energy supplies are disrupted by an enemy country and,
   
2. it balances the oil prices for domestic consumers in the event of extreme price fluctuations in the international oil market. It is in keeping in view of such things that countries like the US keeps Strategic Oil Reserve of up to six months.

Why should India need a Strategic Oil Reserve? There are at least four reasons why a country like India should have a credible Strategic Oil Reserve:

1. India consumes around 100 million tones of oil products each year. India depends on the international market for 70% of its crude requirements (80 million tones were imported in 2001-2002, and this year consumption is predicted to be around 85 million tonnes) ¹ . While two decades ago the country was able to meet around two-thirds of the needs of petroleum products domestically, the situation has radically changed today. India today barely manages to meet one-third of the demand for petroleum products indigenously. ² Even government estimates indicate that indigenous production would not exceed 32-33 million tonnes around the next few years. ³ With such low domestic oil production levels and predictably dim future prospects, India has to be armed with Strategic Oil Reserve to meet unforeseen 'oil shocks'. Dependence on the international market for oil without credible 'self-reliance' for at least a couple of weeks can be risky for a country like India.
   
2. Most of the 70% of oil that India imports from the international market comes from the West Asian region where politics and the consequent oil policies are highly volatile and thus risky. Moreover, in the event of an armed conflict with Pakistan, the West Asian region is likely to lend support to Pakistan than to India. Over-dependence on the West Asian region for oil, which is currently the case, is dangerous and India needs a Strategic Oil Reserve to meet any adverse impact stemming from that ,
   
3. Strategic Oil Reserve is a must for any country faced with the possibilities of armed conflicts.
   
4. Oil is of immense strategic importance for any rapidly industrializing country. Any disruption in the steady supply of oil or extreme price fluctuations can adversely affect the economic development of India. Therefore it is imperative for India to maintain a credible Strategic Oil Reserve.

India is planning to shell out 13 billion rupees in the next two years to build strategic storage facilities for 15 days consumption of crude and oil products. It will be expanded to 45 days by the end of 2006. ⁴ According to the Indian petroleum minister, the capital coast of building 45 days reserves would be Rs. 4,350 crores and annual maintenance cost would be Rs. 1,800 crores. And the cost of the crude oil, which will be stored, is estimated at Rs. 15,600 crores. ⁵ The cash-strapped Petroleum Ministry is unsure about the financing of Strategic Oil Reserve. The Finance Ministry is in favor of levying cess on oil to raise money to create strategic reserves and the Petroleum Ministry, on the other hand, wants the government to give loan for creating the reserve. The third potion, however, is to allow foreign companies to contribute to building it. ⁶ The recent statements by the Petroleum minister, Ram Naik, indicate that India is in favor of collaborating with the US to build the Strategic Oil Reserve. Naik, who visited the US in June 2003, had explored the possibilities of Indo-US cooperation in creating the reserves. ⁷ The exact nature of the cooperation may have to be further discussed before finalizing, as building a Strategic Oil Reserve is strategically very important and any thoughtless collaboration can prove to be undoubtedly dangerous.

Presently India has a 15-19 day crude reserve and a 45-day stock of petroleum products with oil companies. But since they are with oil companies and not under the direct control of the government, and that the companies are free to use these stocks for their own requirements, they can't be called 'strategic reserves'.

A five-member team appointed by the government of India couple of years ago had identified four locations in different parts of India where major tankages to store oil reserves could be built. As per the committee's recommendations, in the first phase of creating a Strategic Oil Reserve, storage facilities would be created in Rajkot, Mangalore and Vishakapatanam to stock five million tones of oil. ⁸ Of the proposed tankage, 2.5 million tones would be at Rajkot, 1.5 million tones at Mangalore and one million at Vishakapatanam. ⁹ The locations have been identified taking into account two things, namely, the geographical location of the place to make sure that the tankages are safe from wars and natural calamities, and the ability to feed refineries easily in case of an emergency situation. ¹⁰

Having taken over the one-million tone capacity China Bay Tankfarm at Trinkomalee in Sri Lanka on a 35-year lease recently, the Indian government is also planning to use it to stockpile strategic oil reserves to meet  contingency requirements. The importance of China Bay lies in the fact that they are hidden under scrub, making it difficult to see them from land or air. It is also the largest tankfarm located between West Asia and Singapore. <sup>11

1</sup> "Strategic supplies", Editorial,
(www.thehindubusinessline.com/bline/2003/
02/05/stories/2003020500160800.htm)

² Rediff.com via News page, accessed from
(www.gasandoil.com/goc/news/nts04844.htm)

³ Sushma Ramachandran, "Running on empty"
(www.hinduonnet.com/thehindu/2002/01/06/stories/2002010600671500.htm)

⁴ VANS Business News "India to build strategic storage facilities for 15 days", accessed form
(http://www.bharatpetroleum.com/general/gen_petrodaily_inside.asp?nid=N000004023)

⁵ Economic Times, "India, US to work towards building oil reserves", accessed form
(http://www.bharatpetroleum.com/general/gen_petrodaily_inside.asp?nid=N000004084)

⁶ Indian Express, "India considers permitting foreign firms to build oil storage capacity" accessed from
 (http://www.gasandoil.com/goc/news/nts31282.htm)

⁷ n.5

⁸ Tribune News Service New Delhi, February 3

⁹ NDTV.com, "India to build 45 days of strategic oil reserves" accessed form
(http://www.gasandoil.com/goc/news/nts30825.htm)

¹⁰ G. Parthasarathy, Rediff.com via Newspage "On the need to guarantee India's energy security", accessed from
(http://www.gasandoil.com/goc/news/nts04844.htm)

¹¹ Economic Times, "India may use Trincomalee for strategic oil reserves" accessed from
(http://www.bharatpetroleum.com/general/gen_petrodaily_inside.asp?nid=N000004058)  

Happymon Jacob

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