Explained: Why India Plans to Outsource Its Strategic Petroleum Reserves

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Strategic Petroleum Reserves india
Strategic Petroleum Reserves india

New Delhi (ABC Live India): India has agreed to store its Strategic Petroleum Reserves in the United States in July 2020, when an MOU between the U.S. Department of Energy and the Indian Ministry of Petroleum and Natural Gas concerning cooperation on Strategic Petroleum Reserves was signed.

The Information to this effect was shared by Government of India through a Joint Statement on U.S.-India Strategy Energy Partnership after U.S. Secretary of Energy Dan Brouillette and Indian Minister of Petroleum and Natural Gas and Minister of Steel Dharmendra Pradhan co-chaired a virtual ministerial meeting of the U.S.-India Strategic Energy Partnership (SEP) to review progress, highlight major accomplishments, and prioritize new areas for cooperation.

Know About Strategic Petroleum Reserves

Strategic Petroleum Reserves (SPR) is a crude oil stock held by the government of a particular country, as well as private industry, to safeguard the economy and help maintain national security during an energy crisis.

According to a March 2001 agreement, all 30 members of the International Energy Agency must have a strategic petroleum reserve equal to 90 days of the previous year’s net oil imports for their respective countries.

Strategic Petroleum Reserves of India

India is an associate member of the International Energy Agency, thus this IEA’s requirement was not mandatory for India, but in 1990, during the Gulf War a sharp rise in oil prices caused a massive increase to India’s imports and due increase in oil prices, the foreign exchange reserves of India could barely finance three weeks’ worth of imports in the year 1991 and the government came close to defaulting on its financial obligations.

India was able to resolve the crisis through policies that liberalized the economy in the under Leadership of Prime Minister P. V. Narasimha Rao

Thereafter also, India continued to be impacted by the volatility of oil prices, In 1998, India under the leadership of Prime Minister Atal Bihari Vajpayee took lead from IEA’s Strategic Petroleum Reserves requirement for its 30 members, decided to build petroleum reserves as a long-term solution to managing the oil market.

In the year 2004, a Government of India owned the Company was incorporated namely Indian Strategic Petroleum Reserves Limited for creating Strategic Petroleum Reserves of India.

After that India Built Three underground oil storage facilities in Mangalore, Visakhapatnam, and Padur with a total of 5.33 MMT (million metric tons) storage capacities with an investment of $600 million in the first phase.

In the 2017-18 budget, it was announced that two more such caverns will be set up Chandikhole, Odisha, and Bikaner in Rajasthan as part of the second phase.

According to the Indian Strategic Petroleum Reserves Limited annual report of the year 2018-19, India officially approved the construction of a new storage facility in Chandikhole and doubling the capacity at Padur. This would raise India’s strategic reserve capacity to 12.33 million tonnes. This would raise the strategic reserve capacity to 15.33 million tons.

Why India Decided to Store its Strategic Petroleum Reserves in United States?

On July 17, 2020, during the virtual ministerial meeting of the U.S.-India Strategic Energy Partnership (SEP) India ignored its self-reliance dream concept visualized by the then Prime Minister Atal Bihari Vajpayee in 1998 and signed an MoU with the United States for storing or sharing US Strategic Petroleum Reserves in case of any emergency.

It is hard fact that India since 1998 could only able to built 5.33 MMT (million metric tons) storage capacities till 2020.

The Strategic Petroleum Reserves of 12.33 million tonnes approved in 2018 is still under implementation stages, that too in the hands of Indian red tape, infamous for its snake style movements.

The Fast-Changing Geopolitical situations in Asia, especially with recent Chinese’s aggression have forced India to rethink its long term energy security planning, which was earlier based upon self-reliance and now with MoU signed on July 17, 2020, has changed to outsource mode addition to already established/under implementation capacity.  

The details of MoU signed on July 17, 2020, have not been made public yet, thus according to ABC Energy Research Team, as India has now signed MoU with the United States, it should go for an agreement as the United States has signed with Israel in 1975, wherein in an emergency the U.S. is obligated to make oil available for sale to Israel for a period of up to five years.

Further, ABC Energy Research Team also suggested that India should adopt Japan-New Zealand model, wherein Japan is under obligation to sell its strategic reserves to New Zealand in the event of an emergency at the then market rates plus negotiated option fees for the amount of oil previously held for them by Japan.

The United States has the world’s largest reported Strategic Petroleum Reserve with a total capacity of 727 million barrels. If completely filled, according to confirmed reports that US Reserve capacity remained underutilized and the United States wants to sell the space to India, The MoU will not only financially viable for the US, but also offer the US to Control India’s Geopolitical status and well as India’s Energy Security in years to come.

Energy Security of Country is equally important as physical Security, so India Should try to bargain hard with the United States on outsourcing of its Strategic Petroleum Reserve as we expect in case of Arms deals.