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Battle for a full tank

Pradeep Puri | April 05, 2003

What's the worst-case scenario? Gulf War II could drag on for months. It might spread to Syria and Iran and the entire region could go up in flames.

As the Tomahawk missiles and the B-1 bombers go screaming across the skies, the oil tankers would stop coming through the Arabian Gulf. Oil prices would shoot skywards and there would be shortages everywhere from India to remote islands in the Pacific.

Nobody expects an economic and political catastrophe on that scale. But the planners in India's petroleum ministry are prepared for the worst. They've been drawing up plans long before American troops began their drive through the Iraqi desert.

They've prepared for all eventualities -- a short war or a long, prolonged one -- and they are determined that nothing should go wrong. "Everything has been worked out to the last detail," says a senior bureaucrat in the ministry.

India's oil czars have spent almost as much time as the US Army preparing for this war.

The meetings to draw up the plans for India's oil security started in September and by November the entire plan was in place. There is, of course, no telling if it will work. We'll only know about that if the plans actually have to be implemented.

There's no doubt that India is at risk as the soldiers clash on the outskirts of Baghdad. India imports 70 per cent of its crude oil requirements and a large chunk of it comes from the Gulf. So, it goes without saying that any disturbance in the world's biggest oil-producing region is bad news for India.

The war could cut off supplies from the Gulf countries. Even if that doesn't happen prices could climb to exorbitant levels.

But if the bureaucrats and their political bosses are worrying they aren't showing it. Petroleum minister Ram Naik seems complacent both on supplies and prices.

"There has not been any disruption of supplies so far and we do not anticipate any major dislocation in the near future. On the price front too, we have sufficient reserves of foreign exchange to foot any oil import bill."

It should, of course, be said that India is far better off than it was during Gulf War I. At that time India's foreign exchange reserve levels were at rock bottom and any slight dislocation could have upset the economic applecart.

It isn't only the ability to pay that is giving the government confidence. As part of its plans, the government has been stocking up and it has sufficient stocks of crude oil and petroleum products to last two months.

Says Naik: "We have tied up oil supplies with some countries far away from the war zone. Added to this is the supply of three million tonnes per annum of crude supplies that ONGC Videsh Limited will start getting from next month as its share from the Greater Nile project in Sudan."

On the prices front too, Naik is relaxed. "During the 1991 Gulf war, Brent prices had crossed the $40 a barrel mark. This time its maximum price has been only $35 a barrel. Moreover, during the 1991 Gulf war, the country had only $1 billion foreign reserves, whereas now these reserves are exceeding $73 billion."

Petroleum secretary B K Chaturvedi also appears unworried.

"The contingency plans are in place to take care of any difficult situation."

Two scenarios have been considered by the petroleum ministry while drawing up these plans.

The first plan visualises that the military action will be limited to Iraq; and the second plan considers the impact on India's crude availability if the war spreads to other countries leading to disruption of exports from the Persian Gulf region.

If the supplies from only Iraq are disrupted, there shouldn't be a major disruption as the overall global availability of oil would fall by only 3 per cent. India needs about 78.7 million tonnes of crude annually and it imports less than 5 per cent of that from Iraq.

In this scenario, the government would ensure physical availability of oil from other Gulf countries, and outside the region. However, the prices of crude during this period may go up 'substantially.'

In the event that the war spreads and leads to the closure of the Arab Gulf, crude oil supplies to India's refineries could be badly affected.

But India wouldn't be the only country affected. Its plight would be shared by all the major oil-importing countries like Japan, US, France, Germany and Italy.

As per the contingency plan, 'under such a situation, it is likely that the reasons for the closure of Arab Gulf would be addressed quickly and appropriate action would be taken to restart oil exports from the region.'

If oil supplies are disrupted, the petroleum ministry has two fallback plans. Firstly, refineries would go on a worldwide hunt for crude oil and it would probably resort to spot purchases from sources outside the Gulf region.

Secondly, the government would go on a diplomatic blitzkrieg aimed at winning over oil-producing countries outside the Gulf.

These include Egypt, Yemen, Nigeria, Russia, Malaysia, Norway, Angola, Venezuela, Oman and Australia for the supply of appropriate grades of crude oil to India 'during the troubled period.'

Now with the Iraq war entering its third week, the petroleum ministry is also going to fine-tune its contingency plans. It's reviewing the plans every fortnight to make sure that nothing will go wrong.

During the first such review, the government decided to consider the possibility of importing and floating at least 15 days' inventories for public sector refineries by hiring very large crude carriers.

Besides the issue of oil supplies and prices, there's another aspect that India has to consider.

It has made small investments in Iraq's petroleum sector and is involved in exploration in an area called Block-8. India might have invested more but it hasn't been able to because of United Nations sanctions.

Block-8 itself was taken over recently by the public sector OVL after signing a production sharing agreement with the Iraqi government.

To save on costs, OVL brought the block's seismic data to India for processing. It was scheduled to take up intensive seismic activity in the block after the summer.

But now, any further activity in the block will depend upon the outcome of the war and the installation of the new government.

While OVL has earmarked Rs 75 crore (Rs 750 million) for investment in Block-8, it has only spent a few crores so far.

The government is confident that even this minimal investment in Block-8 won't be wasted.

The Iraqi government went through the entire legal process before signing the PSA, so executives at OVL hope that any new government will respect commitments made by the current regime.

However, OVL may have to start afresh on the Tuba field which is considered to have around one-third the oil and gas reserves with Mumbai High.

Both OVL and an Algerian firm, Sonatrach, were holding parallel negotiations with the Iraqi authorities for the field. But these negotiations did not make much headway because of sanctions.

Barring these two projects, India hasn't made much of an effort to participate in Iraq's oil sector. The Iraqi government did invite Indian firms to invest in its refineries, but India couldn't do so because of sanctions.

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