Analysis: Middle East woes may prompt India to expedite SPR leasing, expansion

Escalating tensions around the key Middle Eastern oil route may prompt India to expedite plans to expand its strategic reserves in an effort to ensure supply security and cushion the impact of any potential supply disruptions.

With the bulk of India’s oil imports coming from the Middle East, a series of events around the Strait of Hormuz has set off alarm bells, leading analysts and Indian government officials to say there is an urgent need to seal more deals to lease SPR storage facilities as well as build more strategic reserves capacity.

“The Indian government will need to take ownership and give priority to SPR by speeding up expansion plans given the urgency,” Lim Jit Yang, advisor for oil at S&P Global Platts Analytics, said. “India’s SPR volumes are much lower relative to their oil import needs — when you compare with other major Asian oil buyers.”

Analysts said that more Middle Eastern producers are expected to show interest in storing oil in Indian SPRs, keeping their long-term supply interests in mind.

The move will also help to deepen India’s relations with some Middle Eastern oil producers, who are not only aiming to supply oil to the Asian consumer, but are also looking to establish ground presence in the fast-growing South Asian market through various tie-ups and investment opportunities.

“The execution of the second phase of SPR will be faster than the first phase. Middle Eastern producers are likely to show more interest in SPR projects in the second phase,” Senthil Kumaran, consultant at Facts Global Energy, said.

The Indian cabinet in 2018 approved another 6.5 million mt of SPR under the second phase at sites in Chandikhol in the eastern state of Odisha, which will have a facility to store 4 million mt, and Padur in the southern state of Karnataka, with a capacity of 2.5 million mt.

The second phase will be developed on a public-private partnership, where investors would take the responsibility of constructing, filling up and operating the cavern.

According to Indian Strategic Petroleum Reserves Ltd, or ISPRL, — the designated agency that manages the SPRs — the building of the two proposed projects under the second phase would take six to eight years to complete.

“Encouraging private partnership is a win-win as it will open access to the Indian refining landscape,” Kumaran said.

LEASING OUT TO MIDDLE EAST SUPPLIERS

In the first phase, India set up SPRs in three southern locations — Visakhapatnam (1.33 million mt), Mangalore (1.50 million mt) and Padur (2.50 million mt) — with a combined capacity of 5.33 million mt. All three facilities have been commissioned.

UAE’s ADNOC has already tied up with ISPRL to store 5.86 million barrels at the Mangalore reserve facility. ADNOC has already signed another agreement to lease storage at Padur. Under the agreement, ADNOC can sell oil to Indian refiners, but the government will have the first right to the oil during any shortages.

On Thursday, India’s Oil Minister Dharmendra Pradhan had a meeting with Saudi energy minister Khalid al-Falih during which he invited Saudi Aramco to take part in India’s strategic oil reserve program.

Indian government officials have been in talks with Aramco since 2018 to lease storage at one of the facilities, but no deals have been finalized yet. But they added that they remain prepared for any potential disruptions.

“We are fully prepared to meet any exigency oil demand for nine to ten days, with the current strategic reserve capacity at disposal on top of the refiners’ existing total storage capacity of 64 days,” H.P.S. Ahuja, CEO and managing director of ISPRL, said.

A Mumbai-based analyst added: “If the tension around the Strait of Hormuz turns into a full-blown war, then India would have to face the heat in oil supplies as its strategic oil reserves are very low.”

In addition to expediting storage plans, Indian refiners are also keeping their options open to diversify their purchases even further.

Indian refiners have said that they are looking to step up imports from suppliers such as the US and Mexico.

Platts Analytics projects that India’s economy will soon regain momentum, as the central bank has begun to loosen policy by cutting interest rates, with a stronger oil product demand growth of over 200,000 b/d in 2020, up from an estimated 170,000 b/d in 2019.

India’s oil product demand is expected to stay robust with growth of over 200,000 b/d on an average over 2021-2025, supported by rising population and increasing disposable personal incomes, as the economy continues to expand.
Source: Platts