India and the US have signed a preliminary agreement for cooperating on emergency crude oil reserves, including the possibility of India storing oil in the US emergency stockpile.
This deals comes with many riders, India will have to pay a rental for hiring the storages in the US. This rental will be on top of the international price for oil.
“The alternative is to build our own strategic reserves which will involve huge capital cost and will take a few years to construct. So the rental is a small fee to pay to get immediate access to a strategic reserve,” the official said.
Strategic petroleum reserves (SPR) in the US are built and maintained by private companies.
The oil stored in the US reserves can be used for the nation’s own needs or can be traded to capture price advantage, he said adding these two scenarios work when oil prices rise after India has bought and stored oil in US reserves.
Also, if the sea route is obstructed, having a stockpile in the US will make no difference to India’s energy security as the country will not be able to access them, he said. “It takes a month to ship oil from the US.”
Storing oil in the US is a kind of physical hedging and all hedging comes with a cost, he said.
More importantly, storing large volumes involves paying upfront on purchase of crude oil and companies will have to block so much capital.
India had begun exploring the possibility of storing oil in the US a few months back but couldn’t make much headway as COVID-19 pummelled demand, leading to excess oil around the globe that filled every inch of storage including those on ships.
In such a scenario, storing oil in the US would make a lot of sense if India were to hire a strategic facility maintained by an American oil producer.
On July 17, India and US signed a memorandum of understanding (MoU) that will allow the US to begin sharing with India the knowhow on establishment of a strategic petroleum reserve (SPR). The pact also allows India to explore the possibility of storing its oil in US SPR, comprising underground caverns in Texas and Louisiana.
Global oil prices fell steeply earlier this year as shutdowns from the novel coronavirus sapped demand, but have stabilised at around USD 43 a barrel.
“We are in an advanced stage of discussions for storing crude oil US strategic petroleum reserves to increase India’s strategic oil stockpile,” Oil Minister Dharmendra Pradhan had said on Friday after co-chairing the second India-US Strategic Energy Partnership Ministerial with Brouillette.
The US has 714 million barrels of oil storage capacity in its strategic petroleum reserve, the world’s largest supply of emergency crude oil.
In comparison, India stores 5.33 million tonnes (about 38 million barrels) of crude oil in underground storages at three locations on the east and west coast, hardly enough to meet its 9.5 days needs.
The International Energy Agency (IEA) prescribes its members to have at least 90 days of stock in the strategic reserves.
India has been looking to expand the storage capacity by another 6.5 million tonnes and is also exploring the possibility of hiring storage in the US to stock some oil that can be used in times of extreme price volatility or supply disruption.
India is the fourth-largest export destination for US crude. The US is India’s sixth-largest oil supplier.
India began importing crude oil from the US in 2017 as it looked to diversify its import basket beyond the OPEC nations. It bought 1.9 million tonnes (38,000 bpd) of crude oil from the US in 2017-18 and another 6.2 million tonnes (1,24,000 bpd) in 2018-19.
India, which is 85 percent dependent on imports to meet its oil needs, bought 101.4 million tonnes of crude oil from overseas during April 2019 to March 2020.