Expanding India's oil tanker fleet: the next step for energy security

Expanding India's oil tanker fleet: the next step for energy security
Expanding Indias oil tanker fleet: the next step for energy security

Expanding its native wet freight capacity will be crucial to ensuring India's energy security.

In the effort to ensure full spectrum energy security, India, the world's second largest oil importer, will have to invest in growing its tanker fleet over the coming years. Dependent on foreign crude to satisfy its growing energy needs, state run oil companies have invested tens of billions of dollars in upstream projects over the last six years. From Russia to the United States, it has diversified and continues to grow its footprint in Africa and the Middle East. While both domestic and overseas storage is being expanded and a pivot away from unstable production jurisdictions like Venezuela has meant that upstream supply security has been enhanced, increased threats from an expanding blue water Chinese navy means that oil transport remains vulnerable.

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China and the sea

India's latest move to halt the charter of Chinese-owned oil tankers came on the heels of military aggression by the People's Liberation Army in the Union Territory of Ladakh. This exposed a key weakness in the supply chain which is seeing a rising share in CCP owned vessels. Currently, over 80 per cent of the country's oil requirements are imported through the maritime domain, of which 90 per cent is carried on foreign ships. The corresponding figure for China is around 10 per cent, where the emphasis on fleet building has been central to its self-sufficiency doctrine since the early 2000s.

Furthermore, with domestic Strategic Petroleum Reserves (SPRs) in India still under construction, an expanded tanker fleet provides crucial floating storage capacity that can be used in either times of emergency or during periods of profitable contango plays, as seen earlier this year. Windfall profits that emerge from physical-financial oil storage trades cover the costs of tanker purchase and depreciation several times over. In light of national security considerations going forward, it would be prudent to work towards reducing India's dependency on foreign-owned vessels through supply chain indigenisation.

A chance to close the energy value chain loop

Oil tankers are stationed for re-filling at the storage station of a petroleum company in Mumbai. With domestic Strategic Petroleum Reserves (SPRs) in India still under construction, an expanded tanker fleet provides crucial floating storage capacity during emergencies.
Oil tankers are stationed for re-filling at the storage station of a petroleum company in Mumbai. With domestic Strategic Petroleum Reserves (SPRs) in India still under construction, an expanded tanker fleet provides crucial floating storage capacity during emergencies.

While developed market crude demand growth is expected to decline as the electric vehicle revolution unfolds, the Indian auto and transport industry is set to keep pushing oil imports higher over the next ten years. Meanwhile, as the International Maritime Association (IMO) 2020 environmental regulations around fuel oil sulphur content kick in, the country has a chance to grow a new, clean fleet that can last decades, providing an opportunity to close the energy value chain loop.

A majority of both dry and wet vessels in use are owned and run by the Shipping Corporation of India, and a strategic push for supply chain security would be best initiated by such a government-owned firm that can absorb the upfront cost. Much of the merchant navy's expansion between 2008 and 2018 has been in the cargo liner sector which saw its share of tonnage grow from 8 per cent to 22 per cent, as trade in finished goods increased in line with a burgeoning domestic consumer segment. Despite the high annual single-digit percentage rise in oil consumption, the number of oil tankers rose from 137 to a mere 168 during the same period. With just 1400 vessels plying the seas, India remains out of the top ten ship owners globally, which for the world's fifth largest economy, is a sign of significant under-investment in a critical sector.

Securing oil supplies

Hiring private foreign charterers is often a commercially viable option, however, the State has the chance to build a fleet that can be utilised by both domestic and overseas users alike. As Public Sector Units (PSUs) increasingly engage with and invest in upstream projects and offtake agreements across the world, the freight component can be a rider which can be introduced to ensure capacity utilisation.
The declining growth profile in traditional markets lends India greater power as a sought-after sink in a world awash with hydrocarbons, pointing to end-user leverage in negotiations. Yet, this must be backed up with a sizable fleet. The recent intervention to block Chinese-owned ships in the free market for tanker rental may set the right precedent in the domain of energy security and can be followed up with financial incentives including tax breaks for entities to be no-longer nationality-blind in their chartering. After all, the post-Covid global geopolitical landscape will see countries take stock of domestic interests ahead of benefits from a globalised world. Taking up the role of a leader in maintaining Sea Lines of Communication (SLOC), the ability to create a military and security overlay to its fleet will be crucial in expanding the country′s reach across a range of geographies. Securing oil supplies is an important cog in this wheel and particularly, in India's plan to become a net security provider to the wider Indian Ocean Region.
Surya Kanegaonkar is a commodities professional with ten years of experience in research and trading for a hedge fund, utility and miner.

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