Financial Daily from THE HINDU group of publications
Saturday, Jan 19, 2002
Should India go for strategic oil reserves?
IN the wake of increasing tension between India and Pakistan, the re-thinking on strategic oil reserves is assuming importance. Active parleys are on among the ministries and oil analysts as to whether India should go for strategic oil reserves in the backdrop of the recent tension in the Arab world.
India is susceptible to oil supply disruptions. India feels the global oil shocks. With the domestic production of crude oil stagnant for almost over a decade, and no new major discovery made after Bombay High, India's dependence on crude oil imports has increased from 45 per cent in 1990-91 to as much as 75 per cent in 2000-01.
The exploration awards made under NELP (New Exploration Licensing Policy) are yet to bear fruit. According to the Hydrocarbon Survey, India's import dependence on crude oil will go up to 78-79 per cent in 2006-07, which does not reflect much hope from the exploration contracts awarded under the NELP. The buoyancy in domestic refining capacity, the import dependence on refinery products has dropped substantially from 15 per cent in 1990-91 to 5 per cent in 2000-01. This is both good and bad; the latter because crude would have to be imported if the plants are not to idle.
Another cause for alarm is that over 90 per cent of crude oil comes from West Asia an area always beset with problems. Further, though OPEC's share in the global oil export has declined from 50 per cent in the pre-1990s to 40 per cent now, India's effort to find a long-term alternative has failed. No doubt, Nigeria has emerged a new major source of oil since last year, but the high transport cost deters its viability as a long-term supply source.
With abundant reserves, coal now the main source of energy in India can substitute oil and offer energy to a great extent. But the pattern of oil consumption belies the hope of any such substitution. The transport sector accounts for a major share of oil consumption. Nearly 50 per cent of oil consumption is accounted by diesel and petrol, which renders availability of coal of little consequence. Further, expanding the railways to keep in pace with urbanisation and industrial development is onerous. Hence, the growth of road transport is inevitable, which means ever-increasing demand for diesel and petrol.
The prospects are bright for substituting oil by natural gas, considering that India has 647 billion cubic meters, while the cement extraction is only 28 billion cubic meters. CNG is the best possible substitute for oil as it is also a pollution-free energy source for the transport sector. But large-scale substitution is not possible as gas is not available all over the country. Nuclear energy is no good substitute of oil mainly because road transport cannot use it; also, the gestation period and the huge cost involved in setting up nuclear plants make it less feasible.
One way of reducing dependence on oil imports is by ensuring its efficient use. Developed nations have worked on fuel efficiency aspect ever since the oil shock of 1973. India has not.
With no viable alternatives, India's dependence on oil will only increase; worse, its import dependency will spiral. There is little scope to cut oil consumption too, as the per capita use of 100 kg per year is among the lowest.
Therefore, building strategic oil reserves is a valid option. However, the prohibitive cost is a huge hurdle. The cost of 90-day reserves, the construction of special storages and maintenance are, indeed, huge. But India can mitigate the cost burden by exporting refinery products. Last year, India earned $1.8 billion by its foray into the export market.
With the refinery capacity already exceeding domestic demand and a number of projects on the anvil, export of petro-products can be a significant foreign exchange earner.
(The author is a New Delhi-based freelance writer.)
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