Wednesday 8 February 2017

The Indian government has moved to exempt overseas firms from paying income tax on the local sale of stock left in the country’s strategic petroleum reserves (SPRs) at the end a company’s storage contract.

The proposal is aimed at encouraging foreign players to book capacity in Indian SPRs.

The fiscal incentive was announced last week by Finance Minister Arun Jaitley in the fiscal 2017-18 budget. Previously, income tax relief was only applicable to sales made during an active storage contract.

“Tax exemption on the sale of leftover crude oil stock will encourage foreign companies to invest in setting up Strategic Reserves in India,” Minister for Petroleum and Natural Gas Dharmendra Pradhan tweeted.

In his budget address Jaitley added that the government would build two more crude oil storages under India’s SPR programme.

Digging Deeper

“In the first phase, three such reserves facilities have been set up. Now in the second phase, it is proposed to set up caverns at two more locations, namely, Chandikhol in Odisha and Bikaner in Rajasthan. This will take our strategic reserve capacity to 15.33 million tonnes [112.37 million barrels],” the minister said.

Pradhan, meanwhile, said the state had learned “a lot” from the first phase of construction and that New Delhi aimed to have the second phase wrapped up in three to four years.

India has already constructed a 1.33 million tonne underground storage at Visakhapatnam in Andhra Pradesh, a 1.5 million tonne facility at Mangalore and 2.5 million tonnes at Padur in Karnataka, which is enough to meet 10 days of national oil demand. Abu Dhabi National Oil Co. (ADNOC) recently signed an agreement to hire half of Mangalore’s capacity. The other half is filled with Iranian oil. The Vizag storage site is filled with Iraqi oil and the Padur facility is likely to be filled soon.

The SPR second phase will involve establishing four more caverns, including a 4.4 million tonne Chandikhol site and 5.6 million tonnes at Bikaner. Two more storages are planned at Rajkot in Gujarat and Padur.

A total of 12.5 million tonnes of space will be built, taking total capacity to 17.83 million tonnes. India’s strategic caverns are run by Indian Strategic Petroleum Reserves, a special purpose vehicle that operates under the Ministry of Petroleum and Natural Gas.

Keep Calm and Guzzle On

The SPR programme is vital for a country such as India that depends on imports for more than 80% of its oil needs. The facilities can be utilised to protect India’s economy against oil price volatility.

While production is stagnating thanks to a lack of major new discoveries, Indian oil demand continues to rise at a rapid pace.

BP has projected India’s oil consumption growth will be the fastest of the major economies by 2035, rising from 4 million bpd in 2015 to 9.2 million bpd in 2035. “As a result, the country remains import-dependent despite increases in production,” the UK oil major said.

What Next

India may stand to benefit more from its SPRs if it broadens its strategy. The country is no longer overwhelmingly dependent on a single supplier for its oil and gas, sourcing supplies from Latin America, Africa, Australia, the US and Russia.

Speaking to NewsBase, former Ministry of Petroleum and Natural Gas director T Shridhar said the country’s SPR programme needed to be more flexible rather than simply focusing on meeting domestic demand.

Shridhar said: “India’s SPR infrastructure can be a source of good revenue for the country if it is positioned as a regional hub for parking crude oil. The SPR can cater to big customers both in West Asia, South Asia and Southeast Asia.”