India To Store Crude Oil In U.S.
India plans to store its crude oil in the U.S. strategic petroleum reserves for use not just during emergencies but also for trading to capture any price advantage, officials said.
India and the U.S. on July 17 signed a preliminary agreement for cooperating on emergency crude oil reserves, including the possibility of India storing oil in the U.S. emergency stockpile.
"It is a good concept but comes with a lot of riders," a senior government official said.
For one, India will have to pay a rental for hiring the storages in the U.S. 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 in the U.S. are built and maintained by private companies.
The oil stored in the U.S. 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 the U.S. reserves. "But if the prices fall, you will book losses," he said.
Also, if the sea route is obstructed, having a stockpile in the U.S. 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 U.S."
Storing oil in the U.S. 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 U.S. 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.
Demand has returned but is less than pre-Covid levels.
In such a scenario, storing oil in the U.S. would make a lot of sense if India were to hire a strategic facility maintained by an American oil producer.
"The commercial deal can be structured in such a way that we support the U.S. firm to keep producing even when demand falls, and in return get access to its storage," the official said.
On July 17, India and the U.S. signed a memorandum of understanding that will allow the U.S. to begin sharing with India the knowhow on establishment of a strategic petroleum reserve. The pact also allows India to explore the possibility of storing its oil in the U.S. strategic petroleum reserve, comprising underground caverns in Texas and Louisiana.
U.S. President Donald Trump in March ordered filling the strategic petroleum reserve to its full capacity of about 714 million barrels but Congress failed to fund a purchase.
Speaking to reporters after signing of the MoU, U.S. Energy Secretary Dan Brouillette had stated that the India pact could mirror a recent plan with Australia, which in April committed to spending about $60 million to build an emergency oil stockpile, first by buying crude to store in the U.S. strategic petroleum reserve.
Global oil prices fell steeply earlier this year as shutdowns from the novel coronavirus sapped demand, but have stabilised at around $43 a barrel.
"We are in an advanced stage of discussions for storing crude oil in the U.S. strategic petroleum reserves to increase India's strategic oil stockpile," Oil Minister Dharmendra Pradhan had said on Friday after co-chairing the second India-U.S. Strategic Energy Partnership Ministerial with Brouillette.
The U.S. 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 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 U.S. 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 the U.S. crude.
"Between 2017 and last year, the U.S. crude oil exports to India rose by nearly tenfold to almost 2,50,000 barrels per day. Between March 2016 and May of this year, 68 LNG shipments of over 234 billion cubic feet were exported to India," Brouillette had said on Friday.
The U.S. is India's sixth-largest oil supplier.
India began importing crude oil from the U.S. 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 U.S. in 2017-18 and another 6.2 million tonnes (1,24,000 bpd) in 2018-19.
The volume that Brouillette talked about translates into 12.5 million tonnes of oil imports in a year.
India, which is 85% dependent on imports to meet its oil needs, bought 101.4 million tonnes of crude oil from overseas during April 2019 to March 2020.