How India can build a bigger oil buffer without straining the exchequer

Much has been written on how India should respond to the oil crisis triggered by the US-Israel war on Iran. With Tehran and Washington tentatively starting talks in Burgenstock, Switzerland, on Sunday-despite Iran keeping the Strait of Hormuz closed (that the US has denied), the issue will now broaden to how India can capitalise on a potentially more stable energy and trade environment.

GoI has reportedly asked ONGC to develop a 1.75 mn-t storage facility in Mangaluru at an estimated investment of nearly ₹15,000 cr. Other proposals focus on diversifying fuel procurement by exploring alternative or lower-cost energy sources while accelerating investments in carbon-neutral technologies.

But the former approach is constrained by fluctuating global energy prices and uncertainty created by shifting US sanctions regimes.


The latter, though strategically sound in reducing long-term dependence on fossil fuels, offers only a gradual solution. Large-scale transition to a low-carbon energy system is still some distance away. India must shore up its petroleum stockpile to meet any future eventuality that will adversely affect the rupee, drive up inflation and threaten fiscal strength of the treasury.

Suggesting that oil prices will fall because of the likelihood of end of conflict in West Asia-and clandestine release of millions of barrels of oil from the US strategic reserve to stabilise markets-would be a chimaera. Experts like petro geologist-energy consultant Arthur Berman believe that even if the conflict is resolved soon, crude may, at best, settle at $110/barrel, and, at worst, $140/barrel by year-end. Brussels-headquartered data intelligence company Kpler thinks that oil flows may only return to 50% capacity next year.

This is critical when comparing India's strategic and commercial oil reserves with those of other large economies.

China, despite significant alternative energy diversification, maintains largest reserves at over 1.4 bn barrels, nearly 25% of its annual consumption. Japan hoards 470 mn barrels, accounting for 41% of its annual requirements. The US, which stores a modest 820 mn barrels-accounting for 11% of its annual consumption-has always depended on petrodollar and uninterrupted supply chains to keep it whole.

India, however, despite its growth ambitions, only retains a combined reserve of 279 mn barrels, accounting for 13% of its annual consumption. This will hardly do. But increasing the strategic crude reserve would require substantial funding, which could impair other subsidies and schemes.

Two concepts could alleviate this predicament:

Digital oil bonds
Publicly issuing paper with oil as the underlying commodity would allow the public an alternative investment opportunity in crude without the hassle of physically holding it, and corporations the chance to contain price-volatility risks.

These bonds could be issued in denominations of one barrel of crude oil benchmarked to Brent crude (or an equivalent) and backed by a JV set up by GoI to manage the strategic reserve as a warehouse-keeper. Number of bonds would be limited to the number of physical barrels of oil in the strategic reserve.

Mutual funds and AMCs could launch such schemes as alternative investments, which would be listed and available for electronic trading, providing the requisite flow of funds. Since ownership would vest in bondholders, a liquidation clause could be invoked when crude needs to be released for strategic purposes, enabling a fair and equitable price at which investors can settle their crude oil holdings.

To improve futures market liquidity and broaden participation, GoI could permit digital oil bonds to be used for physical settlement of crude oil futures on exchanges such as MCX, alongside the existing cash-settlement mechanism. This would strengthen linkage between futures and underlying crude prices, provide investors with a secondary-market exit option and enable OMCs to hedge their underlying exposure more effectively.

Supplementary storage
Nominated Indian refiners could operate oil-storage facilities for crude producers in lieu of assigning priority, or the first right of refusal, to supply crude in times of national emergency. This would support the foundation for developing the country as a regional oil-trading hub akin to Singapore or Fujairah.

MNC oil and gas companies could be encouraged to establish crude oil and product-storage facilities (both onshore and floating coastal storage) to facilitate regional oil trading through special oil zones (SOZs) at strategic ports. These SOZs could allow a balanced trading environment along with the fungibility required for trade, supporting market-linked pricing through a bond facility for crude oil and its products held as trading inventory.

This, in turn, could provide policy clarity to facilitate fiscal concessions and tax incentives (like Singapore), and link the underlying stored oil with the futures market (like Dubai Mercantile Exchange).

Oil exchange board
GoI could set up a board to garner wider market participation and provide regulatory supervision to support a large and viable international oil exchange.

Ultimately, India can never be a land of black gold. But if another world-changing crisis like the US-Israel war on Iran erupts in the future-in which neither supply disruption nor price appreciation is survivable without energy security-oil bonds, which free up government funds and wholesale storage facilities, which grant domestic access and scale, may be the next best things.

Tankha is MD, eTrans Solutions. Joshi is former director, finance, BPCL