Petroleum Reserve to Cut Import-Shock Risks: Corporate India

Sep 02, 2014 1:34 am ET

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Sept. 2 (Bloomberg) -- India will be ready to fill its first strategic crude oil reservoir by the end of the year, the head of the project said, advancing Prime Minister Narendra Modi’s goal to shield Asia’s second-largest energy user from supply shocks.

Two more storage facilities on the west coast are likely to be finished by the second half of 2015, Rajan K. Pillai, chief executive officer of Indian Strategic Petroleum Reserves Ltd., said in a phone interview from a New Delhi suburb yesterday. The first reservoir is at Visakhapatnam in Andhra Pradesh state.

India imports more than 80 percent of its crude, and the government wants to protect Asia’s third-biggest economy from supply interruptions caused by calamities or political crises abroad. The three initial depots will have a combined capacity of about 39 million barrels, equivalent to 13 days of imports, Oil Minister Dharmendra Pradhan has said. The government plans to increase that to 90 days of imports by 2020.

“It’s absolutely necessary for a big importer like India to have the oil cover to protect against any disruptions,” said Amrita Sen, a London-based analyst with Energy Aspects Ltd., a research company. “Filling these tanks will be extremely expensive and given India’s budgetary strength, it necessarily doesn’t have the funds. It’ll need foreign help.”

India spent $143 billion on crude oil imports in the year ended March 31. Those purchases represented 32 percent of India’s total imports in the period, according to commerce ministry data.

$4.2 Billion

It will cost about $4.2 billion to fill the three reservoirs at an average Brent crude oil price of $108.01 a barrel this year.

To help reduce that number, the government plans to lease 15 million barrels of capacity in the reservoirs to companies including Abu Dhabi National Oil Co. and Kuwait Petroleum Corp., which they will fill at their own cost, Pradhan told parliament on Aug. 8.

That is likely to save the government about $1.6 billion, easing one burden as it aims to narrow the budget deficit to the lowest in seven years.

The price of Brent crude fell to $101.56 a barrel on Aug. 19, the lowest 13 months, after rising to this year’s high of $115.06 a barrel in June. Prices may increase to $108 by the end of this year, according to the median of 31 analyst estimates compiled by Bloomberg.

Indian Oil

Indian Oil Corp. and Hindustan Petroleum Corp., India’s federal government-controlled refiners, may be asked to help fill some of the capacity, Pillai said last October. ISPR was set up in 2006 to build the contingency storage. Hindustan Petroleum has already leased part of the Visakhapatnam cavern for storage, the company’s refineries director B.K. Namdeo said.

The reserves “will always help us in times of difficulties and it is an initiative which is really required for a country of our size our consumption,” Indian Oil Chairman B. Ashok said on Aug. 20.

Indian Oil shares rose as much as 1.9 percent to 387.85 rupees and traded at 384 rupees as of 11:01 a.m. in Mumbai. Hindustan Petroleum gained as much 1.4 percent in early trading before declining 1.1 percent to 461.30 rupees. The benchmark S&P BSE Sensex index increased 0.3 percent.

About 85 percent of India’s oil imports come from the Middle East and Africa.

Below Cost

The state-run refiners themselves depend on government money to earn profits. They are required by the government to sell fuel below cost to help curb inflation and make it more affordable in a nation where almost 70 percent of the 1.2 billion population lives on less than $2 a day.

Indian Oil and its units had 109.9 billion rupees ($1.8 billion) of cash and equivalents as of March 31, 26 percent less than a year earlier, according to data compiled by Bloomberg. Total debt rose 5.9 percent to 949.2 billion rupees.

The petroleum reserve adds India to the group of developed nations and China that have such facilities. The U.S. strategic petroleum reserve has a capacity of 727 million barrels, according to the Department of Energy. China, which imports more than half of its crude, had 141 million barrels of strategic storage capacity last year and plans to add a further 50.3 million barrels, according to data compiled by China National Petroleum Corp.

The storage reserve takes India closer to standards set by the Paris-based International Energy Agency, which mandates its members hold stocks equivalent to 90 days of imports.

State-run Engineers India Ltd. has already completed studies on building new caverns in four locations with a total capacity of about 92 million barrels, according to the oil ministry.

“It is critical for the Indian economy to have ample strategic storages, no matter who fills up the tanks,” Pillai said in a Aug. 22 phone interview.

--With assistance from Ganesh Nagarajan in Chennai.