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ANALYSIS: India's maiden SPR oil sale to soften price blow, draw leasing interest

Highlights

State refiners have started picking up crude cargoes from SPRs

Policy to aid in financing second phase expansion: Platts Analytics

ADNOC currently only overseas firm to hold capacity at the caverns

India has started selling crude oil from its strategic reserves to state refiners, a move that will help to achieve the twin objectives of softening the blow from surging global crude prices, while creating space at the reserves that can be leased out to private and international companies.

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The move is part of New Delhi's decision earlier this year to liberalize its oil policy by allowing Indian Strategic Petroleum Reserves Ltd. to commercialize up to 50% of its reserves -- under which ISPRL can use 20% of the volumes for trading and lease out the remaining 30% of the capacity.

"We are selling to oil marketing companies. This will help to create space that we will then offer for leasing. We would be able to get some clarity by December on the volumes that can be leased out," H.P.S. Ahuja, CEO and managing director of ISPRL, told S&P Global Platts.

UAE's ADNOC is currently the only overseas company with any capacity at the caverns, holding about 750,000 mt under a government-to-government deal. The recent decision to lease up to 30% of capacity with international investors and oil marketing companies excludes the capacity already leased to ADNOC.

An evolving trend

According to industry sources and analysts, the policy move would help to attract more private and overseas investment into the sector, whose growth is crucial for achieving the country's energy security.

"The new policy is an effort to commercialize the country's storage by freeing up some stocks and make way for leasing," said Lim Jit Yang, adviser for Asia-Pacific oil markets at S&P Global Platts Analytics.

"Although the scale of India's oil release is too small to have an impact on cooling the international market, it is a step forward in achieving its twin objectives of managing price risk and generating revenue," he added.

India's move to sell oil from its strategic reserves coincides with a similar decision by China in September to release crude oil from state reserves via auctions. The first auction by China was held in Sept. 24, in which it offered 7.38 million barrels.

Analysts see the decisions by India and China to use strategic reserves for commercial purposes as signs that New Delhi and Beijing are taking similar paths to control inflationary pressures building in the economy.

Sumit Pokharna, vice president at Kotak Securities, said with crude oil currently hovering around $80/b, India's higher crude import bill is one the reasons that is putting the country's trade deficit under pressure.

India's September 2021 trade deficit jumped to $22.9 billion as against $13.8 billion in August 2021, mainly due to exports increasing by 21.4% to $33.4 billion and imports increasing by 84.8% to $56.4 billion, he added.

"Smartly, with crude prices at elevated levels, the government has started supplying crude oil from SPRs. The strategy to purchase crude at lower levels and supply in the domestic market when prices rise meaningfully will benefit the country and the refiners in a big way," Pokharna added.

Generating cash to expand

Analysts said that the move by ISPRL to sell crude that it purchased last year when prices had crashed following the pandemic, would help the company to generate revenue to facilitate an expansion of its capacity.

"The ultimate aim of liberalizing its SPR policy is to attract private participation in its expansion of new facilities that are planned," Lim said.

In its first phase, India set up SPRs at three locations with a combined capacity of 5.33 million mt: 1.33 million mt at Visakhapatnam, 1.5 million mt at Mangalore and 2.5 million mt at Padur in Karnataka. All three facilities have been commissioned.

In the second phase, India is augmenting storage capacity further by creating additional 6.5 million mt of SPRs at two locations: 4 million mt at Chandikhol in Odisha and another 2.5 million mt at Padur. It will be set up on a public-private partnership model.

The first phase, which is fully filled now, can cater to almost 9.5 days of India's crude oil requirements. The second phase will add another 12 days of requirements.

Government sources said that the leasing tenure with prospective interested parties would be worked out mutually and New Delhi was looking to provide enough flexibility on the tenure period.

India's petroleum ministry last October also allowed ADNOC to re-export the crude to other countries from the caverns, with the first right of refusal retained by the government.

The move has raised the level of investment interest among international players, as it gives oil producers flexibility to independently decide how to deal with up to 50% of their volumes stored in the SPR.

India's oil products demand is expected to grow by an average of more than 200,000 b/d over the next few years, supported by population growth and an increase in disposable personal incomes, according to Platts Analytics.