India gives foreign players green light to fill Padur SPR

14 November 2018, Week 45, Issue 651

The Indian government has given foreign companies the green light to fill the 2.5 million tonne (18.33 million barrel) underground strategic petroleum reserve (SPR) at Padur in Karnataka State.

The companies will be allowed to use the facility as a hub for regional oil trading, but would have to sell the stored crude to the government in the event of a national supply disruption.

“The filling of the [SPR] under a public-private-partnership model is being undertaken to reduce budgetary support of government of India,” an official statement said. “The storing of oil by foreign firms will help save the government 100 billion rupees [US$1.39 billion] in filling cost,” Cabinet Minister Ravi Shankar Prasad said.

The first phase of SPR programme, which is run by state-owned Indian Strategic Petroleum Reserves Ltd (ISPRL), established 5.33 million tonnes (39.07 million barrels) of storage capacity in underground rock caverns in Mangalore and Padur in Karnataka and Visakhapatnam in Andhra Pradesh State.

The 1.5 million tonne (11 million barrel) Mangalore cavern, launched in October 2016, was filled by Abu Dhabi National Oil Co. (ADNOC) and ISPRL, which bought its crude from Mangalore Refinery and Petrochemicals Ltd (MRPL) and Bharat Petroleum Corporation Ltd (BPCL). The 1.33 million tonne (9.75 million barrel) Visakhapatnam SPR has also been filled, with Hindustan Petroleum Corporation Ltd (HPCL) hiring a third of the capacity.

Padur SPR

The Padur SPR, which has four 625,000 tonne (4.58 million barrel) compartments, remains empty. The Padur site is located about 5 km from India’s southwest coast and 40 km from the MRPL refinery. Oil traders and producers could use the facility to store their oil and sell it to refineries in the region on commercial terms, Prasad said.

“India will have the right of first refusal to buy the crude oil stored in the facilities in case of an emergency,” he added. Quoting unnamed sources, Reuters said India intended to lease out half of Padur’s capacity to ADNOC. ISPRL will sign an initial agreement with ADNOC in the presence of Indian Minister of Petroleum and Natural Gas Dharmendra Pradhan.

“We will sign a MoU with ADNOC to fill two compartments in Padur along the same lines as the Mangalore cavern,” one source said. An ADNOC spokesperson said: “We are already working with India’s ISPRL in Mangalore and we hope to build on this positive relationship in the future.”

Saudi Arabia is another big oil producer that has expressed interest in investing in India’s second SPR phase.

The envisaged investment in Phase-II is 110 billion rupees (US$1.53 billion) compared with about 41 billion rupees (US$568.6 million) for Phase-I.

Under Phase-II, India intends to build an additional 6.5 million tonnes (47.65 million barrels) of storage – 4 million tonnes (29.32 million barrels) at Chandikhol in Odisha and 2.5 million tonnes (18.33 million barrels) at Padur. This will push India towards its target of 21 days of emergency oil supply. Adding the 65 days of commercial crude held by refiners, India will be very close to the International Energy Agency’s (IEA) mandated 90 days of reserves for its member countries.

SPR importance

While India has been planning its SPR programme for several years, with the first cost estimate made in 2005, construction work was delayed several times.

This has turned out to be an expensive mistake, with global crude oil prices rallying over the last two years. Analysts had urged the government to take advantage of low crude oil prices following the 2014 price crash, to no avail. Still, the government’s efforts are welcome despite being late.

India is the world’s third largest crude importer, relying on foreign supplies to meet more than 83% of domestic demand.

With the economy growing rapidly, energy demand is projected to grow faster any other country over the next two decades. Oil product demand grew at a CAGR of 5.5% in from 2013-17.

With domestic crude production unlikely to keep pace with demand growth, India will remain heavily dependent on imported oil for the foreseeable future. As such, the country needs to hedge against energy security risks. Physical availability of crude will not only help the country navigate supply side disruptions, but could also be used to mitigate the fallout from oil price volatility.

Since October 2017, crude prices have climbed 50% in US dollar rates and 70% in Indian rupee terms. While much of this has been driven by structural geopolitical conditions India has little control over, the deployment of SPR crude could allow the government to mitigate the effects such events have on domestic fuel prices.

Edited by

Andrew Kemp

Editor

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