India strengthens ties with Saudi to build oil reserves

Saudi King Abdullah’s visit to India is bound to bring the two nations closer to work on energy issues

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By  Nicholas Wilson Published  February 7, 2006

India, Asia’s third-largest oil consumer, has announced it is building a strategic petroleum reserve by 2015, aiming to boost its energy security as imports rise. Oil analysts said its impact on Middle East crude prices would depend on the state of the market when the reserve is filled up and on the use it is put to once it is in place and functioning. The five million tonne (37 million barrel) reserve will hold the equivalent of 15 days of demand. India will be the first country in South Asia to construct strategic oil reserves, and it matches China’s building of a state stockpile, the first tanks of which were finished mid-2005. The government said in a statement, “The project will enhance the energy security of the country, particularly during short-term oil disruptions.” The storage depots will be built in Mangalore on India’s west coast, and the eastern port city of Vishakapatnam. By western standards the reserve is small, only about 5% of the US government’s strategic reserve. The 26 rich-nation members of the International Energy Agency have to hold reserves equivalent to 90 days of imports. India may, however, expand it later, as a panel set up by the oil ministry has recommended doubling its size to ten million tonnes (73 million barrels). When it is filled up and over what period of time, could affect Middle East producers. Mohammad Ali Zainy, a London-based Centre for Global Energy Studies analyst, said, “If the markets are tight, as they are today, when the reserve is filled, then it will drive prices up. But if they are slack, it won’t have an impact.” Another impact on prices is the use the reserve is put to. The United States has on occasions used it as an internal and external tool to drop prices, not just to make up for a shortage of imports. It is not clear whether Inleaves reserves untouched except in emergencies, or will it follow the political will of New Delhi. Bob Skinner, director of Oxford Institute for Energy Studies, said, “Opec wants price stability, and it’s good to have other players to call on in the event that Opec producers don’t have the spare capacity in the event of a crisis. In this context, the reserve is good for producers and consumers.” The Oil Industry Development Board (OIDB), a government body, will manage the reserve’s facilities. India is attempting to limit its dependence on oil imports by expanding domestic exploration and production and has allowed foreign involvement in exploration, an activity long restricted to Indian state-owned firms. Low drilling recovery rates are a major part of the oil supply problem for India. Historically, recovery rates have averaged only around 30% in currently producing Indian oilfields, well below the world average. It is hoped that allowing foreign investment would bring in technology that was not available to Indian state firms, thereby increasing overall recovery rates. But even increasing domestic production will not slake India’s thirst for oil. Its daily consumption of 2.64 million barrels per day (bpd) is expected to grow an estimated 5% this year, with no signs of slowing in the near future, and its imports are predicted to rise from 70% of its oil requirement to 85% in the next two decades. So India is looking to Saudi Arabia to meet its energy needs — Saudi Aramco plans to massively boost production by 12.5 million barrels a day by 2009. Oil was top of the agenda of Saudi King Abdullah when he visited India in January. Indian prime minister, Manmohan Singh, broke protocol to meet him at New Delhi’s airport — not even former US president Bill Clinton received this honour. That again may be because Saudi has almost replaced Iraq and Kuwait as one of the major sources of oil. Annual trade between the two countries stands at US $5 billion, out of which Indian oil imports account for $4 billion. About 30% of India’s energy needs are met by oil, and 60% of it is imported.

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