Expanding Underground Storage: A Catalyst for India’s Energy Security
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Expanding Underground Storage: A Catalyst for India’s Energy Security

By Ramu C.M.
Doctoral Research Scholar, Department of Geopolitics and International Relations
Manipal Academy of Higher Education, India

Expanding Underground Storage: A Catalyst for India’s Energy Security

If past is prologue, from every oil price shock has emerged a buyer’s market or a seller’s market for crude. After all, global oil pricing benchmarks are susceptible to the security of demand and supply and/or geopolitics. But how often have market forces acted in tandem with geopolitical headwinds to put pressure on prices? Contrary to what the guidebooks may suggest, the combined impact of the COVID-19 pandemic and the oil price war unleashed by the OPEC-plus has sent the price of crude oil crashing to unforeseen lows. With Russia clearly intent on sinking the debt-laden American Shale and Saudi Arabia vowing to flood the global market with cheap crude, the oil bulls (stocks and securities linked to crude oil) are poised to head south. Other leading producers such as the United Arab Emirates and Iraq have also followed suit in contributing to what is touted to be the single largest quarterly glut of crude oil in recent times. The forecast for the rest of the year looks as grim on account of the uncertain decline in demand resulting from the economic fallout of the Coronavirus crisis. Suffice it to say that oil is buckling under the combined weight of a protracted supply surplus and a gloomy demand outlook. That means one is neither looking at a seller’s market nor is there any immediate anticipation of a buyer’s market for crude. This begs the question – where will the excess oil go?

With lockdowns in several countries forcing refineries to either suspend operations or declare force majeure by deferring pre-booked shipments, stakeholders across the various nodes of global oil commerce are struggling to expand their storage capacities for stockpiling the surplus crude. Floating oil storage is on the rise as opportunistic oil traders are scurrying to contract tanker ships to store oil at sea. In the contango that has ensued, with the spot prices of crude seeing a drastic reduction in comparison with the futures prices, these traders seek to pocket the windfalls expected to be made from buying cheap oil now, storing it at sea, and selling it at a later time when prices rise. For instance, in the immediate aftermath of the collapse of the production-cut deal with Russia, the Saudis booked around 25-30 oil tankers, mostly very large crude carriers (VLCCs). Widely perceived as an aggressive business tactic, the Saudi objective was to consolidate market share by facilitating the direct shipment of cheap discounted oil to a willing consumer base. The Saudi gamble not only led to a further drop in oil prices, but it also sent tanker rates soaring to whopping highs. As if that weren’t enough, the move would force other major producers too to slash prices on its crude cargoes in a do-or-die scramble for market share.

Why Must India Focus More on Storage?

What is clear is that the incipient forecast for the appetite for crude will remain passive given the temporary economic paralysis inflicted by the lockdowns. What is also clear is that this is largely because refineries are running out of storage space after having suspended operations or declared force majeure from receiving contracted shipments. However, refinery shutdowns need not necessarily result in a demand paralysis for a country such as India which is not only the third-largest consumer of crude oil but is also a guaranteed long-term market for the same. Under the circumstances, notwithstanding a longer-than-anticipated demand crunch, would it still not be prudent for a leading oil consumer like India to leverage the lower prices when the time is opportune?

Herein lies the impetus for augmenting storage capacity, not just by means of relying on commercial inventories of crude oil and oil products, but more so by expanding the capacity of the country’s strategic crude oil reserves. What is alarming in the current scenario is that producers with higher breakeven costs and already saturated inventories are trying to dispose of their barrels at dirt cheap prices. This trend has been widely reported in parts of America’s oil-producing regions. Such a trend could accelerate the rout in prices which has already been triggered by the zero-sum approach of the oil-producing heavyweights, not to mention on the back of a Coronavirus-inflicted demand crunch. With a broadening supply-demand ratio, it is projected that the world may exhaust its existing storage capacity by the end of the second quarter.

India’s Record with Underground Crude Storage

Image Attribute: A natural underground rock cavern has been reshaped near the port of Vishakhapatnam on India’s eastern coast, a part of the underground storage facilities being constructed to store emergency oil reserves. / Dated: December 23, 2013,/ Source: Indian Strategic Petroleum Reserves Ltd (ISPRL)

Apart from the commercial storage of oil by refineries in floating roof tanks, India stores emergency stockpiles of crude oil in salt caverns underground. These stockpiles are referred to as Strategic Petroleum Reserves (SPRs). The storage caverns are carved out of natural salt domes using water injected through a well drilled into it, while the brine solution formed by the dissolution of the salt is pumped out through separate disposal well. Crude oil is generally non-corrosive does not react with the adjoining walls of these rock formations, thereby ensuring optimal shelf life for itself. Where the rock formations are deemed unstable, the inner walls of underground facilities are lined with concrete. India currently has three SPRs, one each in Vishakhapatnam (Andhra Pradesh), Mangalore and Padur (both in Karnataka), with a combined total capacity of 5.33 million metric tonnes (MMT) of crude (1.33 MMT, 1.5 MMT, and 2.5 MMT respectively). These are jointly administered by the Indian Strategic Petroleum Reserves Limited (ISPRL). 

Image Attribute: ISPRL Mangalore / Source: Engineers India Limited, India

Image Attribute: ISPRL Mangalore / Source: Engineers India Limited, India

India had used the low oil price era of the recent past to fill a substantial portion of the SPRs mostly with bulk purchases from Iraq and Iran, and later made plans to acquire crude under a lease agreement with the Abu Dhabi National Oil Company (ADNOC) and Saudi Aramco. There are reports that the oil ministry is seeking to exploit the current situation to top up the existing SPR capacity with rebated crude purchases from Riyadh and Abu Dhabi.

In the event of prospective cataclysmic supply risk, it is estimated that India’s SPRs could cater to the country’s fuel needs for 12 days. Add to this the 65 days of stockpiles the refineries are estimated to hold, and one could rest assured of net supply of crude oil for 87 days. Nonetheless, on a serious note, this figure still falls short of the insatiable requirements of a growing energy consumer such as India, especially in the face of exigencies of overwhelming proportions. The Central Government has further approved the construction of an additional 6.5 MMT capacity, to be allocated between two new SPR facilities in Chandikhol, Odisha (3.75 MMT) and (an additional one) in Padur (2.5 MMT) respectively. Moreover, two other projects are in the pipeline in Bikaner, Rajasthan (3.75 MMT) and Rajkot, Gujarat (2.5 MMT) respectively. Even though the new additions could potentially increase the reserve utilization window by an approximate three weeks or more, a long-term SWOT analysis would strictly call for a higher acreage of underground crude storage facilities. It seems only prudent to attach a sense of urgency towards developing this expanded capacity; even more so as energy-dependent economies plod through an era of extreme oil price volatility.

Not Only Oil but Also Gas

Underground storage is not limited to crude oil. Natural gas could also be stored underground either in depleted oil/gas reservoirs or salt caverns and aquifers. Presently, the practice of gas storage is only in the planning phase in India whereas, in countries along the temperate zones, particularly Europe, where natural gas remains the quintessential heating fuel in winters, gas storage hubs have become an integral part of energy policy. With major Indian LNG (Liquefied Natural Gas) importers such as Petronet LNG and Gas Authority of India Limited (GAIL) declaring force majeure on import commitments, many ships with cheap spot cargoes of the super-chilled fuel are either idling offshore or have been forced to dock alongside the western coast’s regasification terminals – albeit without takers, the likes of which include power plants and petrochemical/fertilizer industries. Unlike oil, gas is less fungible and continues to be traded largely on contracts with a take-or-pay clause. There is no denying that the emergence of a buyer’s market (in LNG) over the last few years has given more flexibility to the importer, for instance, with the addition of a downward quantity tolerance (DQT) provision that allows the buyer to forego a fraction of the shipments in the assigned delivery period. Nonetheless, the importer, sans substantive storage capacity, stands to be at a loss in terms of not being able to leverage the lower prices and still having to pay a penalty for what it cannot buy.

Underground storage of hydrocarbon fuels has its unique advantages. Far from its logistical advantages of cost-effectiveness and minimal surface land usage, it is insulated from most natural disasters and human-induced damage to critical infrastructure, as in during air raids. Besides, it offers clients, especially those oil producers in the geopolitically turbulent Persian Gulf, insurance against threats, along with the premium of a guaranteed long-term market for their produce. India’s well-developed downstream segment (refining, oil and gas processing) is a bonus, although as opposed to oil and its by-products, a proactive effort is required in terms of developing adequate transport infrastructure for natural gas and boosting per capita gas consumption. Due to the inherent intermittency in electricity generation and distribution, underground natural gas storage should facilitate the timely availability of feedstock for gas-based power plants. 


Not only is India blessed with conducive geology, but it is also equipped with the skilled manpower and technical wherewithal for carrying out the kind of advanced complex excavations that are essential for underground hydrocarbon storage. In addition to having the strategic foresight and policy appetite for such projects, Indian decisionmakers and fellow stakeholders alike are expected to work towards bringing more regulatory/contractual clarity in the execution of these projects. Besides minimizing cost overruns, this will help in reducing the gestation periods required for commissioning these projects on a priority basis. In the years to come, India will need to look a lot beneath the ground for a solution to its energy import problems. The need of the hour is a well-planned and well-coordinated strategy for optimizing underground hydrocarbon storage – one which not only has flexible funds at its disposal but could also provide a buffer against future price volatility and demand/supply shocks. 

About the Author:

Ramu C.M (ORCID: 0000-0003-1068-5050) is a doctoral research scholar at the Department of Geopolitics and International Relations, Manipal Academy of Higher Education, India. He focuses his research primarily on the geopolitics of Energy and Mineral Resources, Oil & Gas, the Middle East, and the Post-Soviet Region.

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DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of the IndraStra Global.