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India has significantly increased its budgetary allocation for strategic oil reserves to enhance domestic inventories, aiming to strengthen energy security and protect refineries from extreme price volatility during geopolitical conflicts, such as Russia's ongoing conflict with Ukraine and Israel's clashes with Hamas and Hezbollah in Palestine and Lebanon, respectively. Strategic petroleum reserves allow countries to defer fresh orders during periods of high prices or secure additional barrels when crude oil prices are under pressure.

While presenting the Union Budget for 2025-26 on February 1, India’s Union Finance Minister, Nirmala Sitharaman, announced a budgetary allocation of Rs 5,876 crore for building strategic petroleum reserves during the financial year 2025-26. This marks a substantial increase of approximately 46 times compared to the revised estimates of Rs 130 crore allocated for the previous year.

“Sustainability is another major theme, with initiatives like the expansion of the Jal Jeevan Mission, the launch of the Nuclear Energy Mission, and incentives for clean-tech manufacturing supporting both environmental goals and energy security,” said Rakesh Nangia Founder & Managing Partner, Nangia & Co LLP.

A move towards energy security
In April 2024, India announced plans to build its first commercial crude oil strategic reserve to mitigate the immediate impact of price volatility, enhance energy security, and promote economic stability. This first-of-its-kind strategic reserve will align India with developed and developing nations such as the United States and China, enabling the country to accumulate crude oil inventory during periods of low global prices and utilize domestic stockpiles during times of elevated price levels.

The Government of India established a Special Purpose Vehicle (SPV) named Indian Strategic Petroleum Reserves Ltd. (ISPRL) to build and operate strategic petroleum reserves in the country. In April 2024, this independent entity invited bids for constructing 2.5 million tonnes of underground storage at Padur, as stated in the tender document. The significance of this project is underscored by India’s position as the third-largest consumer and importer of crude oil globally, with approximately 85 percent of its annual crude oil consumption being imported.

This project is proposed to be implemented in two phases. Phase I involves constructing a strategic petroleum reserve in underground unlined rock caverns for storing 5.33 million tonnes of crude oil across three locations: Visakhapatnam (1.33 million tonnes) in Andhra Pradesh, and Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes) in Karnataka.

In Phase II, the company plans to develop a commercial-cum-strategic reserve in underground unlined rock caverns, along with associated above-ground facilities, including dedicated Single Point Mooring (SPM) systems and related pipelines (offshore and onshore). This phase aims to store 2.5 million tonnes of crude oil at Padur-II, with a cumulative capital expenditure of Rs 5,514 crore.

Govt develops Phase-I project
While Phase I of this project’s storage facilities were built entirely at government expense, Phase II is proposed to follow a public-private partnership (PPP) model, where private investors will design, build, finance, and operate the storage infrastructure. Interestingly, the government has proposed providing financial assistance to private investors and has invited them to specify the financial grant required for building the reserves or the premium/fee they are willing to offer to the authority.

ISPRL has proposed acquiring approximately 215 acres of land for Padur-II, with efforts to secure the land already underway. In the Phase I reserves, the United Arab Emirates’ (UAE) Abu Dhabi National Oil Company (ADNOC) has leased half of the 2.5 million tonnes of storage at Padur and the 1.5 million tonnes facility at Mangalore. ADNOC uses this reserved space to serve its Indian customers.

However, the government granted export permission to ADNOC last year, allowing the company to export crude oil from the Mangalore reserves to enhance operational flexibility. While the remaining 1.25 million tonnes at Padur have been filled by ISPRL, 0.75 million tonnes of storage capacity at Mangalore remains vacant but is expected to be leased out soon.

Reports indicate that out of the 1.33 million tonnes of storage built at Visakhapatnam, 0.33 million tonnes were constructed at the expense of Hindustan Petroleum Corporation Ltd. (HPCL) for its captive consumption. Of the remaining capacity, HPCL has leased an additional 0.3 million tonnes, with the rest of the storage expected to be leased out to other interested oil refineries.

Petroleum ministry’s budget rises 11%
India’s Finance Minister, Nirmala Sitharaman, allocated a total of Rs 19,326 crore to the Ministry of Petroleum and Natural Gas (MoPNG), marking an 11.28 percent increase from the revised budgetary provision of Rs 17,367 crore for the previous year. This allocation represents a 21.31 percent rise compared to the original budgetary allocation of Rs 15,930 crore for the previous year.

Oil marketing companies (OMCs) were granted Rs 12,100 crore for liquefied petroleum gas (LPG) subsidies for FY 2025-26, compared to the Rs 14,700 crore (revised estimates) allocated for FY 2024-25. However, the under-recovery faced by state-run refiners on the sale of LPG cylinders in FY 2024-25 significantly exceeded the allocated funds. IOCL reported an under-recovery of Rs 14,325 crore on LPG cylinders in the first nine months of FY 2024-25, while BPCL and HPCL reported under-recoveries of Rs 7,228 crore and Rs 7,599 crore, respectively, during the same period.

Assocham view
According to Manish Singhal, Secretary General of Assocham, “The Union Budget 2025-26 is a comprehensive roadmap aimed at accelerating India’s growth trajectory and realizing the vision of a ‘Viksit Bharat’ by 2047. With a strong emphasis on inclusive development, infrastructure, innovation, and sustainability, the budget seeks to address key challenges while unlocking opportunities across sectors. The government’s focus on enhancing middle-class spending power through substantial tax reforms is commendable and timely, as it will directly contribute to boosting economic activity.”

The emphasis on fiscal consolidation, coupled with strategic investments in agriculture and infrastructure, underscores a commitment to sustainable development. While prioritizing infrastructure and capital expenditure, the government remains steadfast in its fiscal discipline. The fiscal deficit for FY 2024-25 is set at 4.8 percent, with a projected reduction to 4.4 percent in FY 2025-26. This disciplined approach ensures that central government debt continues to decline as a percentage of GDP.

The Union Budget 2025-26 lays a robust foundation for achieving a ‘Viksit Bharat’ by 2047. It prioritizes human capital development by enhancing healthcare, education, and nutrition, while providing significant support to agriculture and MSMEs. Additionally, the budget emphasizes urban infrastructure, clean energy initiatives, and tax reforms, fostering inclusive growth and sustainable economic progress.

DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com