How India is striving to meet its oil and gas needs

Asia’s third-largest economy imports more than 80% of its oil needs

FILE PHOTO: An oil refinery of Essar Oil , which runs India's second biggest private sector refinery, is pictured in Vadinar in the western state of Gujarat, India, October 4, 2016. REUTERS/Amit Dave/File Photo

India is ramping up its efforts to improve its oil security to ensure it can meet the country's rising energy demands.

With prime minister Narendra Modi's visit to Saudi Arabia last week, the Indian government on Tuesday announced that Indian Strategic Petroleum Reserves Limited (ISPRL) had signed a memorandum of understanding with Saudi Aramco, which could mean that the Saudi company would keep millions of barrels of oil in India's underground storage facilities, designed to meet emergency needs.

“Because of the ongoing geopolitical risk, India needs to focus on developing more strategic oil reserves to avoid crude oil supply disruption risk,” says Sumit Pokharna, a research vice president, oil and gas, at Kotak Securities, based in Mumbai. “Notably, so far, Abu Dhabi National Oil Company (ADNOC) is the only foreign company storing oil in India's strategic reserves. We believe India needs to tie up with more energy rich countries.”

India is the world's third-largest importer and consumer of crude oil, depending on imports for more than 80 per cent of it oil needs. The International Energy Agency (IEA) says that oil demand in India increased by 5 per cent last year over the previous year and it forecasts that its energy requirements will grow by more than any other country over the next 20 years.

Analysts say that while building up strategic petroleum reserves is part of India's efforts to improve its oil security, global producers also stand to benefit from bolstering their energy ties with India and gaining access to a market that is increasingly thirsty for oil, as it economy expands. India's aim is to become a $5 trillion economy in the next five years.

“We need oil exporters and exporters need India,” says Amit Bhandari, a fellow of the energy and environment studies programme at Gateway House, a foreign policy think tank in Mumbai. “If we look at the global oil demand today, the US is producing more oil, so their imports are going to decline. Japan and western Europe have been seeing their oil consumption fall for the last 25 years."

He adds that “if I'm a large exporter like Saudi Arabia or Abu Dhabi, I worry about demand security - they need to sell oil for the prosperity of their economies”.

India's already a critical market for oil exporters, with crude oil imports in the financial year to March 2019 reaching 207.3 million tonnes, according to official data published by the Press Trust of India news agency. Iraq was the top supplier, followed by Saudi Arabia, Iran, and the UAE.

The rising demand for oil in Asia's third-largest economy comes despite the country's efforts to boost renewable energy and its attempts to control the severe pollution problems found in several of the country's major cities, including its capital, New Delhi, which has been gripped by severe smog in recent days.

“The potential for domestic oil and gas production in India is very limited,” says Mr Bhandari. “And our view is that import dependence is only going to increase.”

He explains that for a long time, India did not keep strategic petroleum reserves, noting that this was  because “it cost money and India didn't have it, and second, we are very close to the Arabian Gulf, just a week's sailing time, so chances of a supply chain disruption were limited”.

“Certain problems you start addressing when you reach a certain level of development,” he says.

“Like other major economies, we're now also trying to create strategic petroleum reserves. Historically, we have largely relied on the commercial stocks that the oil refineries and marketing companies have maintained. Typically, that would be around 35 to 40 days of oil in storage.”

Currently, India's strategic petroleum reserves can hold about 10 days worth of oil.

Under an agreement, countries that are part of the IEA have an obligation to hold emergency oil stocks equivalent to at least 90 days of oil imports. India is not a member of the IEA, though.

China, which has not joined the IEA either and is the world's largest importer of oil, does not disclose how much it holds in its strategic reserves. But China's National Energy Administration in September said that it had about 80 days of oil in storage, including the supply in its strategic petroleum reserves. Analysts point out that China is much further away than India from many oil exporting countries, putting it at higher risk of having its supply disrupted.

It was only in 2005 that the India actually launched its strategic petroleum reserves initiatives, and started building 5.33 million tonnes of strategic crude oil storages at three locations: Visakhapatnam, Mangalore, and Padur, on the east and west coast of India. These storages are constructed in underground rock caverns. Last year, India announced that would construct two new reserves: a 4 million tonne storage facility at Chandikho in the eastern state of Odisha, and another 2.5 million tonne facility at Padur. In total, all of these facilities would give India 22 days of emergency coverage.

ADNOC is storing 5.86 million barrels of crude oil in the Mangalore facility and a year ago it signed  a memorandum of understanding with ISPRL to look at keeping its crude oil at the facility in Padur.

ADNOC is also a stakeholder, along with Saudi Aramco and a consortium of Indian state-run companies, in a vast refinery and petrochemical complex, planned for Ratnagiri in the western Indian state of Maharashtra.

“Global oil producers want to gain a foothold in India,” says Abhishek Bansal, the chairman of Abans Group, an India financial services company. He adds that it is critical that India is able to source oil reliably at attractive prices “to ensure both our economic and geopolitical stability”.

A Reuters report, citing an Indian government official, says that India plans to lease a quarter of its Padur reserve to Saudi Aramco, which would hold about 4.6 million barrels of oil.

Saudi Aramco declined to comment and ISPRL did not respond to a request for comment.

The oil that is stored in the reserves is primarily intended for India's strategic purposes, but Reuters reports that Saudi Aramco would be able to sell some of the oil to Indian refiners.

India has taken other steps to improve its oil security, including diversifying its crude oil sourcing, importing crude oil from the US and Russia, for example. It has also made investments in oil fields in Russia and an Indian consortium comprising of ONGC Videsh, Indian Oil Company and Bharat PetroResources, was last year awarded a 10 percent participating interest in Abu Dhabi’s offshore Lower Zakum concession.

Nilesh Ghuge, an analyst at HDFC Securities, says that the fact that India has few natural resources to produce its own oil and limited investments abroad,  mean that its efforts to secure oil “are inadequate this point of time”. Strategic reserves are only intended to cater to short term emergencies, he points out, and are not a long term solution to meeting the country's oil needs.

Mr Ghuge, however, also adds that “for the last two decades, we've imported oil without any interruption, so I don't think there's a problem”.

But the incident in September when drones attacked Saudi Aramco processing facilities in eastern Saudi Arabia highlighted the potential risks to India's oil supply and the need for it to continue its strategy to secure its crude oil supplies, some analysts say.

“Earlier, India was only importing crude oil and only a few global energy companies made strategic investments in India,” says Mr Pokharna.. “Now, the scenario has changed a lot. Large, energy-rich countries are looking for strategic investments in India to capture the huge market, diversify country risk and ensure their regular crude oil supply. Needless to say, this will ensure energy security in the long term.”

But there is still more to be done to be fully prepared, he adds.

“The government should plan more such storage capacity,” says Mr Pokharna. “In this regard, India should invite global upstream companies to invest in crude oil strategic oil reserves and allow them to store oil reserves. This is a win-win situation for both the countries.”