Strategic petroleum reserves economic analysis of SPRs in India
Student name: Mr Pankaj Kumar
Guide: Dr Kaushik Deb
Year of completion: 2010
Host Organisation: The Energy and Resources Institute (TERI)
Supervisor (Host Organisation): Ms Ruchika Chawla
Abstract: In view of the rising oil import dependence and given that several oil supply sources are geopolitically unstable; the government has decided to expand its stock of petroleum reserves through Strategic Petroleum Reserve (SPR), Though an SPR is meant to cushion an economy against supply shocks, it also adds to the costs of the country. A large investment in technology, infrastructure and manpower is required in storage of petroleum reserve. This huge expenditure may create a fiscal burden on the economy. Additionally, there is also a big opportunity cost of holding crude oil in the reserve. Thus a detailed analysis is required to determine the net benefit of investing in and holding oil in SPRs for the Indian economy.
The proposed study aims to provide analytical economic inputs towards SPR planning in India and would be value adding in terms of identification of criteria for short listing locations and funding options, assessment of costs and ownership options as well as the economics of a petroleum storage hub.
In this paper the review of international experience is done which will further help in providing insight into the criteria adopted for SPR decisions on:
• Financing mechanism available and suitable funding methods
• Predetermined guidelines for trigger and release mechanism for SPR
• Optimum inventory and mix
• Study of IEA’s experience on SPR
While conventionally SPRs have been government-owned, there is a trend of private agencies investing in and co-owning oil stockpiles. There are also several instances of regional stockpiling. The concept of a storage hub is also catching on as both a strategic as well as a business proposition as in the case of Japan and South Korea.
Various funding options are evaluated individually and in combination. For instance, budget-based funding is constrained by India’s growing fiscal deficit, while endeavoring budget neutrality through an additional cess may not be politically viable. Debt financing is evaluated carefully in the context of strategic investments. Involvement of private finance will require balancing to make sure that the operation of the reserves is undertaken responsibly.
To conclude, given the constraints that deficit budget poses on the government, private investment seems inevitable. However, further research needs to be carried out to suggest possible modalities of the same.
