Deep in the bowels of the earth, in underground rock caverns connected by tunnels extending over 7 kms under the hills of Visakhapatnam, India’s plans for a strategic reserve that could hold up to 1.3 million tonnes of crude oil are in the final stages of implementation.
The project, set to be inaugurated by end-July, is part of a strategic plan to build an emergency stockpile with millions of barrels of crude, on the lines of the reserves that the US and its western allies set up after the first oil crisis of 1973-74.
For India, the Visakhapatnam crude reserve might be a first of its kind project, but is part of a larger plan. As part of this, the Centre would set up Strategic Crude Oil Storage of about 5.33 million metric tonnes (MMT) at two other locations in the country apart from Visakhapatnam – Mangalore (1.5 MMT) and Padur (2.5 MMT) in the first phase. It’s tough work. In Visakhapatnam, to create the caverns, nearly 8 million cubic metres of rock that weighed over 21 million tonnes had to be scooped out of the earth. In the run-up to the commissioning, water was let into the rocks around the tunnel at high pressure to prevent the crude from seeping out — a process called ‘hydraulic confinement’ — and the mouths of the tunnels were then sealed with concrete plugs three metres thick by the executing utility — the Indian Strategic Petroleum Reserves Limited (ISPRL) — a special purpose vehicle floated as a wholly-owned subsidiary of the Oil Industry Development Board for the management of the strategic crude storage. The other two projects at Mangalore and Padur, both on the western coast of Karnataka, are nearly complete, waiting only for the pipeline connection from the nearest ports.
Crude oil from the reserves are to be released by an empowered committee constituted by the government, in the event of any supply disruptions from abroad. These include any natural calamity or any unforeseen global event, leading to an abnormal increase in prices. The project involves capital cost of Rs 4,098 crore. Crude oil cost would be approximately Rs 11,725 crore (calculated at an average crude oil cost of $50/bbl and exchange rate of 1US$= Rs 61.75).
The concept of building underground caverns to store oil is not new. In the US, the crude reserve is stored at four sites in the Gulf of Mexico, each located near a major centre of petrochemical refining and processing and with each site containing a number of artificial caverns created in salt domes below the surface. The world’s second largest emergency supply of oil is reported to be in Japan, which has a strategic reserve composed of three types of stockpiles (see box).
While the concept of massive caverns deep below the surface of the earth has been traditionally marketed as an energy security measure that can be a defence against an attack or invasion of some sort, underground storage is, by far, also the most economic method of storing petroleum products. According to an expert from the National Institute of Rock Mechanics, Kolar, Karnataka, the underground facility rules out the requirement of large swathes of land, loads of security, ensures less evaporation and, since the caverns are built much below the sea level, it is easy to discharge crude into them from ships.
The three storage facilities to be implemented in the first phase can hold 13 days of India’s crude stock requirement. The International Energy Agency (IEA) actually recommends 90 days. So, clearly, there is need to build more. A second phase is also under planning, which seeks to create 12.5 million tonnes of storage capacity, at Padur, Chandikhol (Odisha), Bikaner (Rajasthan) and Rajkot (Gujarat). Chandikhol is likely to be underground concrete tanks while in Bikaner, which has mountains of salt underground, a cavern is easy to build.
Keeping in view the current phase of low crude oil prices, experts cite this as an opportune time to proceed with the dedicated strategic oil reserve. In terms of arranging the crude, Indian Oil Corporation is learnt to have purchased two million barrels of crude oil from China’s Unipec to be shipped into Visakhapatnam and three more purchases, totalling six million more barrels, were being negotiated to fully charge the Visakhapatnam facility. “This crude oil will come to the Visakhapatnam cavern and the crude will remain with ISPRL. Crude oil will not be owned by the oil companies. We have requested the oil companies like Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited to help them in procuring crude oil. The payment will be made by the government by way of budgetary provision of funds,” an official involved in the exercise said.
India’s strategic requirement
The dedicated strategic reserve is something that is long overdue, given India’s dependency on imported fuel to meet its needs. India consumes an estimated 3.8 million barrels a day, of which about 80 per cent is imported, making it the world’s fourth-largest oil consuming nation in the world. The IEA predicts that by 2020, India could well be the largest oil importer, increasing the country’s vulnerability to threats of physical supply disruptions and to sharp price fluctuations.
The concept of dedicated strategic reserves was first mooted in 1973, after the first oil crisis. Western strategic reserves have been tapped during the first Gulf War (1991) and after Hurricane Katrina (2005). Besides the energy security, there is a commercial angle to it as well. Even as limited storage option would offer ISPRL the leverage to be a serious player in the international oil markets, with the option of releasing inventory when prices surge and recharging reservoirs whenever the crude is on a downcycle. Experts point to the option of storage being leased out to West Asian refiners, especially since it reduces their freight costs into Southeast Asian markets.
On the details of crude oil purchase agreements executed to fill in the caverns, a ministry official said: “IOC and HPCL, in early March 2015, were advised to place the orders for 2 VLCCs (very large crude carriers) each of Basrah Light Crude for their own requirement with the understanding that if the approval of Cabinet Committee on Economic Affairs is obtained, the load can be diverted to ISPRL for filling the crude in the Visakhapatnam rock cavern storage facility and the companies can issue fresh orders for their own use.”
The CCEA, in its meeting held on March 31, 2015, had decided that the entire cost for filling the crude oil in Visakhapatnam cavern would be met by the government against the Twelfth Plan outlay of Rs 4,948 crore under the budgetary support scheme for the Indian Strategic Storage Programme for storage of crude oil by ISPRL. The remaining amount would be used for filling up the strategic caverns being constructed at Mangalore and Padur.
The inauguration of the Visakhapatnam reserve could be the starting point for India’s move to limit the uncertainties over its quest for energy security.
GLOBAL CRUDE RESERVES
THE US: The country’s Department of Energy’s Strategic Petroleum Reserve (SPR) is an emergency fuel storage that is the largest emergency supply in the world with the capacity to hold up to 727 million barrels. As of end-February 2015, the inventory was 691.0 million barrels, which was equivalent to about 37 days of oil at 2013 daily US consumption levels of 18.49 million barrels per day. The total value of the crude in the SPR is approximately $43.5 billion. The United States started the petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 oil embargo, to tide over future temporary supply disruptions. The SPR management office is located in New Orleans, Louisiana. The reserve is stored at four sites on the Gulf of Mexico, each located near a major centre of petrochemical refining and processing. Each site contains a number of artificial caverns created in salt domes below the surface.
Japan: The country has the second largest emergency supply of oil with a reported capacity of close to 600 million barrels. The SPR is composed of two types of stockpiles — state controlled reserves at eleven different locations totaling 324 million barrels and privately-held reserves of petroleum held “in accordance with the Petroleum Stockpiling Law” of 129 million barrels. The Japanese SPR is run by the Japan Oil, Gas and Metals National Corporation.
China: The Chinese Strategic Petroleum Reserve consists of a government-controlled strategic reserve complemented by mandated commercial reserves. The planned state reserves of 475 million barrels plus the planned enterprise reserves of 209 million barrels are expected to provide around 90 days of consumption or a total of 684 million barrels.
European Union: In the European Union, according to Council Directive of December 20, 1968, all 27 members must have a strategic petroleum reserve within the territory of the E.U. equal to at least 90 days average daily internal consumption.