India to top up strategic oil reserve with Rs 5,000 cr buy as prices drop

Global crude oil fell about 40% in March (to about $25 a barrel now) so far after talks of production cut between the OPEC and Russia failed.

India has decided to take advantage of the low oil prices in major producing centres in Saudi Arabia and the UAE to top up its strategic oil reserves created to meet the emergency in times of exigencies, two government officials privy to the information said.

It has decided to buy oil worth Rs 5,000 crore (about $670 million) at current price of around $30 a barrel for deliveries starting in April-May to fill up three petroleum reserve caverns with a capacity of 5.33 million tonnes (MT) of oil created by the India Strategic Petroleum Reserves Ltd (ISPRL).

Global crude oil fell about 40 per cent in March (to about $25 a barrel now) so far after talks of production cut between the OPEC and Russia failed.

Major Gulf oil producers have now decided to increase oil production in complete disregard to market confirms where coronavirus outbreak had further dented demand resulting in oil price crash.

"The plan is to first get Aramco and Adnoc to fill strategic reserve capacity that they can also use for commercial gains later. If companies are reluctant at this juncture, the ISPRL will buy oil on its own once government provide it with requisite budget. Alternatively, PSU oil marketing such as IOC, BPCL may be asked to contract oil for storage in the reserves," said one of the government officials.

"Filling reserves at this juncture with low oil prices will help our initiative to build larger strategic oil capacities," the official added.

It is estimated that the government would save between $500-600 million if just over half of the existing strategic reserve capacity is filled with Gulf oil. The benefit will not only accrue from lower global oil prices, but Gulf oil producers have indicated that they would also offer good discount on oil.

Around half of the 5.33 MT of India's strategic petroleum reserve is full now. Once full capacity is contracted and filled, the country would be in a position to meet 9.5 days of its oil needs through the strategic reserve.

India currently has operational 5.33 million tones underground strategic reserve facilities at Vishakhapatnam, Mangalore and Padur. Another 6.5 mt facility is coming up at Padur and Chandikhole.

Work on two more facilities in Bikaner and Rajkot would be initiated soon. When completed, these would hold enough oil to meet over a month of domestic requirements.

In addition, the Oil Ministry has told ISPRL to identify new sites so that storage for 90-100 days stock of oil ready in the country at all times.

A large strategic oil capacity could benefit a lot from lower oil prices as it presented huge savings for the government and companies that also could be commercially exploited for larger gains.

The present budget of Rs 5,000 crore would be sufficient to fill entire 5.33 MT tonnes of reserves that is already half filled. This would not have been possible earlier, when oil prices were high.

The ISPRL has signed a Memorandum of Understanding (MoU) with the ADNOC for the lease of half of its 2.5 MT at the Padur facility. Last year, it also signed an MoU with Saudi Aramco for the lease of a quarter of Padur SPR.

The ISPRL has already leased half of the 1.5 million tonnes capacity in Mang alore storage to ADNOC.

It has also filled its 1.03 million tonnes Vizag facility with Basra oil from another OPEC producer Iraq.