Cess may fund strategic oil reserves

The government is looking at a couple of financing options for setting up three strategic oil storage facilities, which have been cleared by the Cabinet last week.

To meet the capital investment of Rs 1,650 crore (Rs 16.50 billion) for the construction of the cavern storages and Rs 5,000 crore (Rs 50 billion) for the purchase of 5 million tonnes of crude, the government is considering a one-time lumpsum budgetary grant.

According to this plan, the annual operating expenses of the facilities and the inventory carrying costs of Rs 800 crore (Rs 8 billion) will be met through the cess that has been already levied on crude under the Oil Industry Development Act.

Alternatively, both the initial capital investment and the annual operating and inventory costs may be met by levying a "special purpose cess" on petroleum products. This will be on the lines of the road cess being levied to finance national highway projects.

If the government chooses the second option, it may bring in a mechanism similar to the one created under the Central Road Fund Act, 2000, which allows it to levy a special-purpose cess on petroleum products to finance the construction of highways and roads across the country.

For managing storage operations, the government proposes to set up a special purpose vehicle, which will be fully owned by a public sector oil company. The SPV will own and control crude inventories, and also coordinate the release and replenishment of crude stocks.

However, there will be a provision in the memorandum of association of the SPV that will ensure that the inventory procurement and replenishment will be done through an empowered committee constituted by the government.

There will be another provision in the MoA to ensure that stocks can only be drawn under specific instructions from the government, except for crude circulation on account of quality requirement and repair and maintenance of storage facilities. If the government decides to impose the cess, the SPV will get the funds from it through a special purpose levy.

The Centre's models for the financing of the project seem to be based on the German and Japanese ones. In Germany, the system is managed by a specially-created quasi-legal agency, EBV. The agency was created by law and financed entirely by bank credit.

All refining and importing companies are compulsory members of EBV. The German government has not granted it any funds and has given no guarantee except in the case of the liquidation of EBV, in which case the government will underwrite all its debts.

The Japanese system involves both the government and the private sector. It maintains crude reserves through the Japan National Oil Company and also requires private players to maintain stock.