What India’s strategic fuel reserve means for Gulf oil producers

This photograph taken on October 4, 2016 shows an Indian oil refinery belonging to Essar Oil at Vadinar, some 380km from Ahmedabad. (AFP)

Every country needs a strategic fuel reserve to tide over conflict, natural disaster or a potential economic blockade. India is well on its way to doing the same, with a bit of help from its traditional oil suppliers in the Gulf. The move is also opening a window of opportunity for cooperation at various levels.

One major step in this direction was announced earlier this month when India’s minister of state for petroleum & natural gas, Dharmendra Pradhan, informed the country’s parliament about an oil storage and management agreement signed between Indian Strategic Petroleum Reserve (ISPRL) and Abu Dhabi National Oil Company (ADNOC) of the UAE. The agreement was for filling up one of the two caverns at Mangalore Strategic Petroleum Reserve (SPR) facility.

Pradhan said that India has 63 days of existing storage based on estimated commercial reserve of crude oil, petroleum products and gas. The total 5.33 million metric tons (MMT) reserve of the first phase of the program is estimated to supply approximately 10 and a half days of India’s crude requirement based on the consumption during 2015-16.

This is by no means a unique undertaking as other developing countries have either done it or are in the process of getting there. According to Global Market Insights, oil storage market size was over 1,400 million cubic meters in 2015 with forecast to grow over 4 percent from 2016 to 2025.

More importantly, this is happening at a time when oil market is beginning to recover after a difficult phase, leading to the dawn of a new reality for oil consuming countries, as well as Gulf oil producers, who have been supplying oil to India for decades.

Dr. Mohamed Ramady, energy economist and a geo-political expert on the GCC, says current oil prices have benefitted India in several ways, by reducing foreign exchange payments and creating more domestic and international competitiveness. According to him, this has prompted India to create strategic oil reserves like the US, China and Japan through imports, and through local currency swaps when oil prices fell to $35-40 ranges.

“Another element is to wean the economy away from higher polluting coal-based industries. A diversified oil reserve management policies also gives India a semblance of energy independence in case of supply disruptions due to geo-political events and the trend is to build up such reserves at the $50-55 price ranges,” says Ramady.

Signaling urgency

The ISPRL-ADNOC partnership – formalized during the visit to Sheikh Mohammed bin Zayed Al Nahyan to India in January – is just one example. Momentum gathering around the project, however, also signals the urgency.

“India has arrived a bit late to the game when it comes to setting up its strategic reserves,” says Vandana Hari, founder of Vanda Insights, a Singapore-based boutique provider of oil industry research and analysis. According to her, the 5 MMT – or just over 36 million barrels – of reserves is a beginning and doesn’t do much in terms of energy security.

“As a country dependent on imports for more than 70 percent of its crude needs – a ratio that is only set to grow rapidly – India will need to accelerate its SPR program. The norm in the OECD countries is 90 days of net oil imports in strategic storage,” she says.

Partnering with suppliers

Vandana says it makes perfect sense for India to bring in its major crude suppliers as partners in the strategic reserves program: it is a mutually beneficial dependency.

“The oversupplied global oil markets of the past three years have unleashed fierce competition for market share among producers in the Middle East, especially for the fastest-growing and major consuming countries in Asia such as India,” she says.

According to her, the UAE, for instance, needs storage space for its oil, and storing it near or within the consuming country means not only a captive market but savings on shipping time and freight during emergencies, when crude prices and transportation costs may have spiked.

“On the flip side, India gets ready access to crudes that are a part of its refineries’ regular diet. Leasing the storage space, rather than keeping it under government ownership and control is a good idea, as it provides India a source of income,” says Vandana.

Geopolitical uncertainties

Faraz Shams, a senior analyst at BRG Enterprises Solutions, says that with the oil markets showing signs of volatility and many oil producing regions being caught in geopolitical uncertainties, “it is imperative that big consumer countries move toward insulating themselves from the vagaries of the oil market and geopolitical upheavals”.

“The strategic reserves would go a long way in cushioning India from the disruptions in oil supplies in adverse circumstances,” he says. At the same time, according to Faraz, this will provide national oil companies of the Gulf an entry in the booming downstream sector in India.

“Companies like ARAMCO and ADNOC have already expressed interest in entering the burgeoning downstream projects in India partnering with local companies. The GCC countries have also committed to invest in the infrastructure sector in India through their Sovereign Wealth Funds, which can offer great returns in long term,” says Faraz.

Business and strategic potential

Building strategic reserves doesn’t mean disruption of energy interdependence that have existed between India and the Gulf for years.

“The reserves are only a small part of the total demand, over 80 percent of which is fulfilled by imports (202 million barrels of crude oil was imported in 2015-16). In fact, partnership such as the one with ADNOC with regard to filling the reserves offers further business opportunities to GCC-based oil companies,” he says.

Under the terms of agreement, India has first rights to the crude stored in the reserves. However, ADNOC can also utilize that oil to cater to the demands of regional countries which can be a great logistical advantage considering India’s strategic geographical location.

Saving cost?

To some though, this also signals a slight shift in India’s approach to energy mix, especially from this part of the world. Dr. Reza Yeganehshakib, professor of Middle Eastern studies at Fullerton College and a geopolitical and energy analyst, says India has been pursuing energy diversification for a long time but it became extensive after the fuel price decline.

“For India, this policy means not only diversifying the sources of energy (suppliers) but also the types of fuel, especially moving toward more natural gas and LNG imports to replace coal and crude oil,” he says. According to Dr. Reza, India imported 2,262 million metric standard cubic meters of LNG in October 2016 that shows an 18.6 percent increase in LNG imports comparing to that of 2015.

“By taking advantage of the recent decline in LNG prices and signing a long-term contract with RasGas of Qatar, India saved around $3 billion. While Saudi Arabia and UAE are still India’s top crude suppliers, consisting 21 percent and 13 percent of the country’s oil demand, it is expected that Iran, US, Qatar, and Australia will become India’s major LNG and natural gas suppliers by 2025,” Dr. Reza says.

Back to the future

This could possibly mean switching to LNG and natural gas and lowering crude import from GCC. “But when this happens, India will follow China’s footsteps in taking advantage of current low energy prices and store more oil and gas in its reserves to guard its economy against energy prices rebound in the future”.

Going by his assessment, India may initially increase its crude import from GCC countries as well as Iran and Nigeria to fill such new ISPRs. “Yet after 2025 when India is expected to import and use more LNG and natural gas, this crude import from GCC suppliers, Iran, and Nigeria may significantly drop”, , Dr. Reza concludes.

Not everyone is swayed by this argument though. Talmiz Ahmad, the former Indian ambassador to Saudi Arabia, Oman and the UAE, says India obtains the bulk of its oil imports (about 50 percent) from the GCC countries and this situation is not likely to change.

“In fact, by 2040, India will get about 90 percent of its oil from the Gulf. Gulf suppliers have the advantage of geographical proximity and the fact that Indian refiners are geared to using Gulf oil”. According to him, the proposed reserve is quite small and will have hardly any impact on the quantum of India’s oil imports.

Whether this new emerging reality shifts this traditional supply-demand relationship into more robust partnership between the two sides remains to be seen.
Ehtesham Shahid is Managing Editor at Al Arabiya English. For close to two decades he has worked as editor, correspondent, and business writer for leading publications, news wires and research organizations in India and the Gulf region. He loves to occasionally dabble with teaching and is collecting material for a book on unique tales of rural conflict and transformation from around the world. His twitter handle is @e2sham.

Last Update: Thursday, 2 March 2017 KSA 07:57 - GMT 04:57

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