Strategic Petroleum Reserves In India - Energy Security, Legal Challenges And The Need For A Regulatory Framework
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Category: Administrative & Regulatory Law
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STRATEGIC PETROLEUM RESERVES IN INDIA: ENERGY
SECURITY, LEGAL CHALLENGES AND THE NEED FOR A
REGULATORY FRAMEWORK
Abinaya R M, LL.M (Natural Resources Law), Tamil Nadu National Law University, Tiruchirappalli
ABSTRACT
Strategic Petroleum Reserve plays a crucial role in mitigating risks associated with oil supply disruption and the sudden rise of prices, and also in ensuring energy security. This article explores the significance of SPR, tracing its evolution from 1990s oil crisis to the establishment of SPR in India. India’s engagement with the international frameworks such as IEA has been addressed highlighting the global standards with regard to stockpiling of oil. It also analyses the key challenges in implementing SPR including the concerns relating to environmental protection, displacement of local population, costs of operation and maintenance, transition towards renewable energy, etc. This article emphasizes that though SPR plays a significant role in ensuring energy security, this must be integrated with broader aspects such as energy conservation and environmental sustainability.
It also underscores the need for robust legal framework governing SPR for its long-term viability. 1.
INTRODUCTION
Petroleum security is an important aspect of national security, and in the same way Strategic Petroleum Reserve (SPR) is important for national energy security. The concept of energy security boomed in 1970s when there was an oil crisis, wherein there was a huge fluctuation in the price of the oil and the prices of oil skyrocketed. This is when the developed countries came together and established International Energy Agency (IEA) in the year 1947, proposing the concept of energy security for the very first time.1 At present, the IEA countries hold stocks to equivalent to 90 days of the net import. The main purpose of SPR is to reduce the impact 1 Lei Zhang, A Comparative Study of Strategic Petroleum Reserve Policies of Major Countries in the World, 195 ENERGY POLICY (2024), https://www.sciencedirect.com/science/article/abs/pii/S0301421524003823 (last visited Mar 14, 2025).
that may arise due to any disruptions in the supply of petroleum products. These oil stocks are stored in underground salt caverns. 2 Since the year 1980s, national energy security is not limited to energy issue, it has been attached to various other concepts such as environment, technology and sustainable development. 3 Though SPR is being used as a tool to mitigate the impacts of sharp oil price fluctuations and market volatility, there are also studies suggesting that the influence of SPR when it comes to change in price is very minimal. Hence, there is a need to change the perception towards SPR from the storage for emergency aspect. Further, other considerations such as emergency release, environmental impact, public private partnership, etc should not be overlooked.
This research analyses the role of SPR in ensuring energy security, legal frameworks governing SPR and the challenges that revolves around SPR. Further, this article also aims at drawing suggestions to make SPR more effective.
1. ROLE OF SPR IN ENSURING ENERGY SECURITY
1.1.STRATEGIC PETROLEUM RESERVE
SPR is the oil storage facility, wherein oil is stored in addition to the crude oil and petroleum products that are available with the oil companies. The two most common type of caverns are underground rock caverns and salt caverns. At present, in India, the facility employed for storage of oil is rock cavern. These facilities are constructed in the underground rock caverns. Rock cavern is a space in the rock which is created by human for storage purposes, and when it comes to hydrocarbons, this is considered as the safest storage means. 4 The principle followed for storage of oil in the underground rock cavern is ground water pressure or hydrostatic pressure. This contains the oil within the unlined rock cavern.
As the density of oil is lower when compared to water, the transmission of water that takes place through fissures and joints moves towards the underground cavern, and the bottom of the cavern consists of a drainage system, wherein the water gets 2 Strategic Petroleum Reserve, U. S. DEPARTMENT OF ENERGY, https://www. energy. gov/ceser/strategicpetroleum-reserve (last visited Mar 14, 2025).
3 Lei Zhang, supra note 1.
4 FE Online, Why India Is Storing Crude Oil in Underground Caves, and Who Came up with the Idea, FINANCIAL EXPRESS, Jun. 29, 2018, https://www.financialexpress.com/policy/economy-why-india-is-storing-crude-oil-inunderground-caves-and-who-came-up-with-the-idea-1224902/ (last visited Apr 6, 2025).
drained. It is the water that keeps the oil in the cavern, hence it can be of any shape, however, it should be below ground water level.5
1.2.HISTORY OF SPR IN INDIA
During the 1990s, when West Asia was hit by Gulf war, the situation prevailing in India has gotten worsen almost leading to bankruptcy. There was a sharp increase in the oil prices leading to foreign exchange crisis i. e. , foreign exchange reserves could finance only for three weeks. 6 This situation was somehow averted by India by bringing in economic policies such as Liberalisation, Privatisation and Globalisation. However, the volatility in oil market continues to persist. In order to curb this and to prevent any such unforeseen events on a long run, the government headed by Atal Bihari Vajpayee came up with the idea of SPR in the year 1998. 7 Until 1998, Oil Co-ordination Committee (OCC) functioning under Ministry of Petroleum and Natural Gas was responsible for managing petroleum products and crude oil including stock piling.
During Administered Pricing Mechanism (APM) regime, Oil Marketing Companies were granted assured returns and inventory of crude oil has also been developed. However, subsequent to the dismantling of APM, the OMCs were expected to have crude stock only under commercial intent. 8 This being so, the Government of India (GoI), on 07. 01. 2006 decided to construct SPR and SPV (Special Purpose Vehicle) to build and subsequently operate the crude reserves. Cabinet Committee on Economic Affairs (CCEA) has been accorded approval for the establishment of Phase-I SPR and the same was built by the funds available with Oil Industry Development Board (OIDB). In order to implement the project, an SPV called ISRL has been established in the year 2005.
As per CCEA’s decision, in the year 2006, the ownership of ISPRL has been transferred to OIDB, which is under the administrative control of Ministry of Power (MoP). 9 The equity contribution by OIDB which has been approved in Indian Strategic Petroleum Reserves Limited (ISPRL) is Rs. 3832. 56 K.
Ajay et al., Study on Rock Caverns for Storage of Crude Oil,
IJMTST
(2021), https://doi.org/10.46501/IJMTST0707045 (last visited Apr 6, 2025).
6 Id.
7 FE Online, supra note 4.
8 UNDERGROUND STORAGE TECHNOLOGIES, (Dr. Atul Nanda, Dr. R. Rath, & Dr. A. Usmani eds.).
9 Indian Strategic Petroleum Reserve Limited, MINISTRY
OF PETROLEUM
AND NATURAL GAS,
https://mopng.gov.in/en/international-cooperation/isprl (last visited Apr 2, 2025).
crores.10 Under Phase-I, underground storage reserves have been built in 3 locations namely, Visakhapatnam, Padur and Mangalore with a total of 5.33 MMT.11 Using this, the energy demand of the nation can be met for approximately 9.5 days. On 08.07.2021, the Union Cabinet approved the commercialization of ISPRL, through which 30% of the cavern’s storage capacity has been allowed for leasing/renting to companies either Indian or Foreign, under the condition that in case of any emergency or exigency, the GoI would have the primary right to 20% of the entire crude that belongs to the Indian company to which it has been leased out. In addition to the above, Union Cabinet has also granted approval for Phase-II construction of SPR under PPP in Chandikhol (4 MMT) and Padur
(2.5 MT).12
1.3.SPR AND ENERGY SECURITY
Energy security refers to the availability of uninterrupted energy sources, that too at an affordable price.13 Given the surge in the economy that India is treading towards and to cater the growing energy demand, stock piling of crude and petroleum products is highly essential.14 SPR can be defined as the inventory of crude oil that is held by the government and private industry to protect the national security and safeguard the economy of the country.15 SPR serves as a cushion against any sharp fluctuation in oil prices disruption in oil supplies, and ensures energy security.16 The underground storage technology can be considered safe and has some distinct advantages such as protection against fire as it is located at a depth and is completely isolated; less requirement when it comes to surface land, etc.17
10 Activities, OIL INDUSTRY DEVELOPMENT BOARD, MINISTRY OF PETROLEUM & NATURAL GAS, GOVERNMENT
OF INDIA, https://www.oidb.gov.in/index1.aspx?langid=1&lev=1&lsid=2&pid=0&lid=2&key=reserve (last visited Apr 7, 2025).
11 K. Ajay et al., supra note 5.
12 Indian Strategic Petroleum Reserve Limited, supra note 9.
13 K. Ajay et al., supra note 5.
14 UNDERGROUND STORAGE TECHNOLOGIES, supra note 8.
15 K. Ajay et al., supra note 5.
16 FE Online, supra note 4.
17 UNDERGROUND STORAGE TECHNOLOGIES, supra note 8.
2. LEGAL AND REGULATORY FRAMEWORKS GOVERNING SPR
i) International Energy Agency: It was founded in the year 1974 in response to the 1973-74 oil crisis. The primary purpose of IEA is energy security and setting up of a collective mechanism in order to counter potential disruptions in the supply of oil. 18 India has joined IEA as an Association country in the year 2017, and has become a fulltime member in 2023. 19 IEA requires its member countries to hold stocks that are equivalent to 90 (at least) of net oil imports of that particular country. It also mandates its members to maintain programs so as to restrain demand in order to reduce the consumption of oil during unforeseen disruptions in supply. 20 ii) Oil Industry Development Act, 1974: This Act has been enacted consequent to the sharp increase in the price of petroleum products and crude oil at the international level.
21 The very objective of the Act is establishment of Board and levy of excise duty. As per Section 6 of the Act, one of the functions of the Board is the establishment of “facility for production, handling, storage and transport of crude oil. ”22 iii) Integrated Energy Policy, 2006: The policy provides for maintenance of reserve which is equivalent to 90 days’ worth of oil imports to act as a buffer against shock from price volatility, and/or buying options from neighbouring big/large storages for emergency supplies. 23
3. CHALLENGES AND RECOMMENDATIONS
CHALLENGES
Out of the various challenges associated with respect to SPR, few are listed below: 18 History: From oil security to steering the world toward secure and sustainable energy transitions, INTERNATIONAL ENERGY AGENCY, https://www.iea.org/about/history (last visited Apr 7, 2025). 19 IEA to start membership talks with India in major step forward for global energy governance, INTERNATIONAL ENERGY AGENCY (2024), https://www.iea.org/news/iea-to-start-membership-talks-with-india-in-major-stepforward-for-global-energy-governance (last visited Apr 7, 2025). 20 Reliable, affordable access to all fuels and energy sources: Energy Security, INTERNATIONAL ENERGY AGENCY, https://www.iea.org/topics/energy-security (last visited Apr 7, 2025). 21 The Particulars of its organization, functions and duties, OIL INDUSTRY DEVELOPMENT BOARD, MINISTRY OF
PETROLEUM
&
NATURAL
GAS,
GOVERNMENT
OF
INDIA,
https://www.oidb.gov.in/index1.aspx?langid=1&lev=3&lsid=41&pid=30&lid=68&key=reserve (last visited Apr 7, 2025). 22 Government of India, Ministry of Law, Justice and Company Affairs, The Oil Industry (Development) Act, 1974, 27 (1974).
23 INTEGRATED ENERGY POLICY REPORT OF THE EXPERT COMMITTEE, (2006).
i) Environmental Concerns: Like any other development project, construction of underground rock caverns is also not an exception to environmental impacts. The drilling and excavation have a greater impact on biodiversity, flora, air quality, noise level, water quality, soil fertility, etc. Though Environmental Clearance has been obtained for the construction activities, the lack of mandate would pave the way for operational mishaps. 24 ii) Displacement of People: For the purpose of carrying out the project, large extent of land has to be acquired. It does not only stop with that, with the increase in demand, the SPR would be expanded leading to expansion of land acquired. This affects the people who depends on the particular locality. The move towards energy security and growth of economy should not overlook the vulnerable section who are also part of the nation.
25 iii) Joint Storage: Though SPR plays a crucial role in energy security, it does not come with a cost. The capital cost of Phase-I project is Rs. 1225. 2 crores, and the maintenance cost is calculated as Rs. 29. 3 crores. The above mentioned does not include within itself the cost of the crude. With respect to India, no full-fledged research has been carried out for evaluating the benefit of SPR. Emergency crude stocks could be beneficial and serve as an effective tool for minimising the cost that would arise out of interruption in supply, if the same is being held by group of companies or country with large economy. 26 iv) Emergency Release: During the time of emergency, the true availability of oil can be masked by the mixing of emergency and commercial stocks. This mixing of oil stocks could lead to a situation wherein the oil companies may try to hide the resources.
27 It may not be out of place to mention that, in the 2025 budget, Rs. 5,876 crore has been allocated for the Phase-II of the SPR project. 28
24 Indian Strategic Petroleum Reserves Limited, Executive Summary, (2014).
25 Saurav Anand, Govt to Expand Oil Buffer with New Reserves in Odisha, Karnataka; Land Awaited from States, ET ENERGYWORLD.COM, Mar. 25, 2025, https://energy.economictimes.indiatimes.com/news/oil-and-gas/howindia-can-invent-the-oil-and-gas-company-of-the-future/119650491 (last visited Apr 7, 2025).
26 INTEGRATED ENERGY POLICY REPORT OF THE EXPERT COMMITTEE, supra note 23.
27 Emergency Oil Stocks and Energy Security in the APEC Region, ASIA PACIFIC ENERGY RESEARCH CENTRE 83 (2000). Budget 2025: Rs.5,876 crore to
ISPRL
Phase
II,
CNBC
TV
(2025), https://www.cnbctv18.com/budget/budget-2025-rs-5876-crore-to-isprl-phase-ii-19550109.htm (last visited Apr 8, 2025).
v) Transition To Renewable Energy: In a steadier phase, environmental concern is also being brought into the ambit of energy sector. India has been moving towards net zero and renewable energy transition. In this phase, considering SPR as the only source of securing energy security is contrary to the vision.29
RECOMMENDATIONS
The lack of concrete legal provision for managing SPR would lead to arbitrariness and deviation from the original intent of the project. The following consideration should be looked into while devising a legal framework for SPR. They are i) The SPR project shall be preceded by a comprehensive Environment Impact Assessment. ii) The description of the location, extent, type, biodiversity present, people who are depended on those area, etc. , has to be clearly analysed. iii) The cost of the reserve along with the product cost and maintenance cost has to be looked at, and then shall be compared with the benefits that can be derived out of it. The primary purpose of the project that protection against sharp hike in prices shall be taken into account and steps should be taken to determine whether the benefits outweigh the cost.
iv) A regulatory authority under MoP&NG has to be constituted for the purpose of overseeing SPR. This would ensure transparency, accountability and coordination. v) A clear distinction between emergency reserves and commercial reserves has to be maintained through SOPs. vi) Provisions for joint and regional strategic storage has to be provided.
4. SUGGESTIONS AND CONCLUSION
Critics consider that though IEP provides for economic growth, energy security and other valuable recommendations, it fails to provide a holistic approach considering socio, economic 29 Policy Circle Bureau, Petroleum v. Renewables: India’s Energy Policy Dilemma amid Transition, POLICY CIRCLE: POLICY INSIGHTS FOR INFORMED GOVERNANCE (2024), https://www.policycircle.org/environment/indiaenergy-policy-dilemma/?utm_source=chatgpt.com (last visited Apr 8, 2025).
and environmental factors. In order for a project to be successful and sustainable in the long run, it should address every aspect rather than focusing only on the economic growth. 30 The SPR model has been introduced in India for the purpose of protecting the country from market price volatility. The very first SPR has been brought in in USA, however, each and every aspect of SPR has been addressed through the Energy Policy and Conservation Act, 1975. However, SPR in India lacks a comprehensive legal framework. Though the Phase-II is to be operated with the joint partnership, clear framework has to be drawn to ensure transparency and accountability. In the surge towards energy transition, investing only on SPR to provide energy security may not be a viable option. Conservation of energy has to be diversified.
There has to be a control over the demand of oil, and diversification of supply of crude oil, promotion of energy efficiency, widen the usage of SPR from just acting as a cushion. The environmental concern shall not be overlooked. In order to ensure this, a comprehensive legislation is required.
30 A critique on Planning Commission document on Integrated Energy Policy: executive summary.
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