an analytics blog for public use: Energy: Oil

Hello,

Some time back, I had written an article on nature of Strategic Petroleum Reserves.
You can read it here:
STRATEGIC PETROLEUM RESERVES AND ‘UN-FLAT’ NESS OF THE WORLD

Today, I have read another article related to growth of Strategic Petroleum Reserves in India.
Read it here: India responds to growth in oil imports

Currently, a 13 day reserve for India is being planned which is proposed to be increased to 90 days worth. So, which are the countries that are suitably covered by this 13 day storage?

Locations and travelling times for an oil tanker to travel from their port to an Indian Port of Paradip:

Thus, a SPR of 13 days will reduce the Indian dependency on Gulf states but will not cover the oil imports from African and South American countries. Details of port and OPEC annual production data are as under:

An SPR of 90 days will however cover all the oil imports requirements from the 13 places considered. However, we don't have the volumetric import data of India from each of these place which would help in preparing an optimization study.

Thank you.

References:

1. Transit Times and Distance using https://www.searates.com

PDF available from here:

Article

Prologue

Since the time USA setup an SPR, there have been many publications from various federal agencies like DOE and from individual researchers to determine if there should be an SPR and if yes, then how large.

The previous academic publications and strategy papers have approached this topic from following point of views:

1. Composition of crude oil to be kept in SPR,

2. Impact of growing GDP of the US and corresponding increasing fuel consumption,

3. Refining capacity/ capability of USA’s refineries and finally,

4. Impact that non-conventional technologies will have on the conventional fuel demand.

I am a full time employed person and neither have that kind of vacation nor inclination to delve into these factors. But, the concept of flat world has always intrigued me and I have felt that it is a kind of misnomer.

Reputed IT companies have built their business model on the concept of differential cost of living and therefore outsourcing technical jobs to cheaper labor at other part of globe. If the world were flat, I believe there would have been no difference if a person was employed at Bhagalpur or Boston. This along with the curiosity of applying supply-chain concepts of economic order quantity and ideal reorder point to reduce cost of storage motivated me to pen down this short write up on the US SPR. I approached it from the restoration of supply chain in case of exigency leading to decline in production and reduced maritime traffic. So, time is a factor of interest in my analysis and not much insight has been drawn from the above mentioned 4 point of views.

If I get an encouraging response to the part I of this series, I will take out time to pen down the remaining two parts as well.

Introduction:

I must say that my interest into strategic management lectures was primarily driven by inherent suspicion towards the people who can segment world issues into a 2x2 matrix (Now, I am one of them, consultants). But, as the sessions progressed and I went through various papers and case studies, the concept of comparative advantage began to puzzle me. Allied concept was that of parity across the world in business opportunities to organizations, the concept which some associate with the statement “The World is Flat”. Professor Pankaj Ghemawat from IESE Business School, Madrid has maintained his non-agreement to it quoting dominance of intra-region mobile communication data as evidence of cohesive communities leading to ‘un-flat’ world.

Considering the Indian context, I recall that US had imposed sanctions on India after it did not sign CTBT (Comprehensive Test Ban Treaty) and conducted successful nuclear experiments at Pokharan in Rajasthan. Consequent, delay in technology transfer and denial of US entry visa to Indian scientists impeded growth in R&D activity. The USA, by itself, is no stranger to ‘un-flat’ness of the world after an embargo led to energy crisis in early 1970s. Learning from the experience, USA created underground SPR (Strategic Petroleum Reserves) at Baton Rouge (Louisiana) and Texas. BBC reports that the US plans to spend USD 200 mn in annual expenses this year to keep 90 days’ worth of fuel in SPR. While the strategic interests can easily discount any rationality of unfavorable pricing, therefore it is meaningless to justify or nullify any benefit beforehand. So, I decided to go about creating scenarios when these strategic reserves will hold the US in good stead while it reestablishes its lines of supply.

To get busy with numbers, I pulled together OPEC annual production data along with their major oil export ports and then used a website to get the average oil tanker sailing time from those ports to Louisiana/ Texas ports. The results are as under:

Sl. No.	Countries	Production	Port	Distance	TTA
1	Iraq	3265	Basra, Khor Al Zubair	11333	29
2	Kuwait	2774	Mina al Ahmadi	11275	29
3	Iran, I.R.	2766	Kharg	11145	29
4	Qatar	716	Ras Laffan	11019	29
5	UAE	2761	Fujairah	10654	28
6	Saudi Arabia	9683	Jeddah	8281	21
7	Angola	1660	Luanda	7500	19
8	Nigeria	1911	Harcourt	6937	18
9	Libya	473	Sidra	6798	18
10	Algeria	1151	Bejaia	5853	15
11	Venezuela	2373	Jose	2302	6
12	Ecuador	542	Balao, Esmeraldas	2259	6

Legend:

Oil production numbers are in thousands of barrels per day for the year 2014.

TTA is the Travel Time to America in days for oil tankers from ports of these countries.

Distance is in miles.

I have tried to look into the figures of oil tanker traffic whenever USA was under attack, most prominently during World War II, but couldn’t find much data. Therefore, I began with creating hypothetical scenarios of oil scarcity during an exigency at USA so that I could foresee a probable course of action.

Scenario I: No disruption in countries providing oil supply to the USA

Scenario 1I: Simultaneous exigency at strategic allies of the USA in Middle East

An exigency at oil suppliers can lead to impaired production (New Production = 50% of normal production) and maritime traffic delays can lead to longer transit times from Middle East to mainland America (Revised TTA = 200% of normal travel time).

Look how African nations catch up with or surpass prominent middle eastern OPEC countries.

Scenario III: Use of Canadian Oil Sands as a backup

This scenario is new and evolving and requires study of US refineries and their crude processing capabilities. Also, the TransCanada’s pipeline network could be a game changer.

COMING UP IN PART-11

HOW MUCH SPR IS TOO MUCH SPR?

My consulting partner is often keen to point out that I am not a person with much knowledge of oil and gas industry. Yet, I would try to define an SPR loosely as an underground oil bunker. So, how quick could countries send oil to the USA if there were no SPR? A classic supply chain model with zero buffer?

I will sprinkle some economics and supply chain in the article as well.

Here are how the shipping times to USA fare across the OPEC producers:

Clearly, the minimum buffer stock that the USA has to maintain is of 4 weeks’ duration. Any stocks with longer duration require a bit of analysis. Currently, USA holds 90 days’ worth of SPR. Canada is next door neighbour as well for any short run elasticity issues. Oil is inelastic substance, due to which its short run demand curve is vertical and any supply side shock will lead to rationing and overpricing.

IN PART-III

INDIA’S TRYST WITH SPR

A take on what should India’s SPR be and what should be the composition of crude oil. The write up will take up the issue of increasing fuel consumption with growing GDP of India, refining capacity/ availability of Indian refineries and then will see the impact that non-conventional technologies will have on the conventional fuel requirements.

References:

1. OPEC MOMR November 2015

2. US DOE archives

3. https://www.searates.com/reference/portdistance/