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India’s SPR Ambitions Could Help Soak Up The Oil Glut

India’s SPR Ambitions Could Help Soak Up The Oil Glut

India is in the process of surpassing China as the world’s most important country when it comes to analyzing energy markets. India’s consumption of various commodities such as coal and oil is still much smaller than China’s, but while China has dominated energy markets since the turn of the century, India’s rate of growth will be much more significant in the years ahead.

China’s GDP growth dipped below 7 percent in 2015, the slowest rate in a quarter century. Meanwhile, India’s is going in the other direction: India’s economy grew at a 7.3 percent annual growth rate in the fourth quarter of 2015.

That is translating into robust demand for commodities. India’s oil demand jumped by 12 percent in January compared to a year earlier, hitting 4.2 million barrels per day (mb/d). India is now the world’s third largest oil consumer, recently surpassing Japan. It now sits just behind China and the United States. Related: $40 Oil Not High Enough To Save A Lot Of Drillers

More importantly, India is one of the few countries where oil demand growth is vigorous. “We expect India and other smaller non-OECD Asian economies and the Middle East to provide most of the 2016 growth,” the International Energy Agency wrote in its March Oil Market Report.

Strong growth comes with challenges. India only produces about 1 mb/d of crude oil and other liquids, which means that it the bulk of its consumption has to come from imports. Its import dependence will likely rise with time – the IEA sees India importing over 90 percent of its oil in 2035, up from about three-quarters today.

Refining capacity is expanding, jumping to a record 4.85 mb/d in January. More refining capacity means refiners need more crude imports. And the Indian government of Prime Minister Narendra Modi is considering relaxing some import restrictions to allow refiners to import more crude. Instead of issuing tenders, refineries may be able to make purchases on the spot market, which will allow oil imports to accelerate, according to the IEA.

Rising import dependence raises concerns about energy security. Of course, one way of dealing with its large import dependence is to produce more oil domestically. India has had trouble boosting output for a whole variety of reasons. BP made major investments in India, but those bets have not turned out well for the British oil giant. Related: $50 Oil As Soon As May?

The Modi government announced reforms in early March in hopes of addressing issues that have long bedeviled the upstream sector. The reforms call for a revenue sharing model with oil companies rather than cost-recovery. The logic is that, under the cost-recovery model, the Indian government and private companies bickered over the details of costs, which led to delays and disputes. Now, companies will share revenues and the government will not waste its time worrying about a drillers’ costs. Additionally, the government lowered royalty rates for offshore drilling. The reforms, the government hopes, will boost domestic production.

Another concern for a major oil consumer is having adequate buffers in the event that a disruption occurs. India does not have a strategic petroleum reserve (SPR) like the United States or China, where stockpiles can be tapped to make up for short-term supply shortfalls.

The recent construction of the Paradip refinery allowed for some additional storage, but only a paltry 4 million barrels. The Indian government hopes to address this issue on a much larger-scale. There is a three-part storage SPR under construction, with the first phase completed, holding 12 days’ worth of import supply. The second phase could boost storage by an additional 28 days’ worth of supply. By way of comparison, the U.S. and other members of the International Energy Agency, have pledged to hold 90 days’ worth of import supply. In the U.S.’ case that is more than 700 million barrels. Related: Why We Could See An Oil Price Shock In 2016

According to the IEA, the Indian government is looking into building a storage facility capable of holding another 90 million barrels.

The government has also come up with some novel solutions to filling its storage facilities. In its new budget, the government will also allow foreign oil companies to avoid paying taxes on oil that is stored domestically within India. It is also working with the UAE on a deal that could benefit both sides. The UAE is filling up its own storage and is running out of space. India, on the other hand, needs oil. The two countries are closing in on a deal that would see oil from the Abu Dhabi National Oil Company (ADNOC) stored at the yet-to-be-completed storage facilities in Mangaluru and Padur. ADNOC will store its oil there, and in exchange for the space, it will make available the use of about two-thirds of the oil, free of charge, in the event that a supply outage occurs.

Time will tell whether or not the government of Prime Minister Modi will improve India’s energy security. But the one certainty is that India’s demand is growing quickly, making it one of the world’s most influential countries when it comes to energy markets.

By Nick Cunningham of Oilprice.com

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