Geopolitics

Indian Energy Security-III
Star Rating Loader Please wait...
Issue Vol 23.1 Jan-Mar 2008 | Date : 29 Dec , 2010

The Pipelines SPV

The pipelines Special Purpose Vehicle (SPV 2) will be a consortium of Indian energy companies and strategic investors some of whom will be investing primarily for tax purposes. This SPV will therefore be owned primarily by Indian companies while SPV 1, which will be the storage SPV, will be owned by oil exporting countries.

There will be two broad categories of pipelines within SPV2.

Also read: Indian Energy Security-I

The first network will consist of crude oil pipelines which will connect the strategic storage to all Indian refineries.

The second network of pipelines will be product pipelines, but with a difference. Unlike conventional product pipelines, these will be multiproduct, bi-directionally flowing lines. Under normal or steady state conditions, they will carry petroleum products from Indian refineries to target markets all over India. All these product pipelines will operate under the common carrier principle and investors will receive dividends which will be exempt from incidence of tax.

Also read: Indian Energy Security-II

The special feature of these pipelines will be that they will be enabled for bi-directional flow and will be configured to enable imports from the Indian east coast in the event of either a process upset in any Indian refinery or if any west coast port / import terminal for petroleum products gets damaged for any reason. By throwing a single switch it will be possible for a remote operator sitting hundreds of miles away to enable the pipeline system to accept petroleum products at a designated terminal (to be decided) on the east coast and move products in the reverse direction to markets all over India. This system is necessary, because in times of a national energy crisis, the immediate need is for transport fuels like petrol and diesel and not crude oil.

Since the storage facilities and pipelines are extremely capital intensive, and require massive upfront investment, which by itself is not economically sustainable, the central government should provide tax and policy incentives to facilitate investment in this essential national energy security infrastructure

The overall financial structure and the basis for the project documents is given below.

International Institutional / Legal Framework

For the scheme to work and to guarantee the transactions leading to the creation of the reserve, its operation as also the payments into and from the Escrow accounts, it might be necessary to provide investor comfort by way of involving organizations such as the International court of Justice in the Hague or some other organization having sufficient credibility to guarantee the agreements. Alternately it could be a committee of nations with shared interests outside of the OECD (the IEA already has huge reserves and could constitute a monopoly) who can act as guarantors acceptable to all concerned parties.

Tax Incentives needed to encourage investment in this Project

Since the storage facilities and pipelines are extremely capital intensive, and require massive upfront investment, which by itself is not economically sustainable, the central government should provide tax and policy incentives to facilitate investment in this essential national energy security infrastructure, besides providing some minimum viability gap funding under the PPP route. The government should provide strong policy support for this project as it lays the foundation for a robust economy, and also constitutes an essential step towards making India a de-facto regional superpower.

Project_Structure_SPVsThe entire project (Storage SPV + Trans-portation SPV) needs to be notified as an infrastructure project for the purposes of tax under:

  • Section 80 IA … 10 year Tax holiday on revenue. In addition, the SPV 1 Project area needs to be notified as an SEZ or a bonded warehouse
  • of some sort where no Indian taxes will be payable.
  • Section 10 (23 G) read with Section 115-O … Allowing exemption of dividend distribution tax to domestic companies.
  • Exclusion from the incidence of MAT (minimum tax on book profits @ 7.5 percent) by removal of section 115 JB for companies eligible for 100 percent tax holiday under sections 80 – 1B.
  • Exemption of sales tax / work contract tax / services tax for vendor provided goods and services.
  • Both the project companies should also be allowed accelerated depreciation and 100 percent depreciation of asset values in the first year itself for tax purposes as a one time write off.

In addition to the above, both project SPVs need to be notified as infrastructure projects to enable them to seek exemption from customs duties by issuing appropriate customs notifications for project related imports. Purchases from the domestic tariff area (DTA) should also be freed from the incidence of excise duties. Entry tax which is applicable on project material in some states needs to be exempted as well.

Also read: Shipbuilding in India

Indian entities will be greatly encouraged to participate in this project if there is a special provision that enables them to take an equity stake in this particular project by implementing a tax optimisation structure which allows equity in the pipeline / storage SPV to qualify for deduction from corporate tax to the tune of 100 percent. For example, if an Indian company were to invest Rs. 100 crores in either project company, it will also get a Rs. 100 crore deduction in its corporate income tax besides equity rights in the project company.

Conceptual Engineering / Design Issues

It is necessary to understand the engineering issues involved in the construction of the reserve, as these will have an impact on the cost which needs to be kept as low as possible.

Comparative Construction Costs

The Strategic Petroleum Reserve (SPR) of the United States currently holds approximately 727 million barrels of crude oil in massive underground salt caverns. The 62 cylindrical tanks have been carved out of huge salt mounds that are located approximately 2000 ft below the surface and have an average height of 2000 feet and width of 200 feet. Warm fresh water was used to leach out the salt which was then discharged into the Gulf of Mexico. Using a simple water hose and nozzle as a construction tool greatly reduced construction costs and this resulted in the lowest possible construction cost of US $ 7 / Bbl.

SPR_United_StatesUnfortunately, we in India, have not as yet found large salt deposits (except maybe in Rajasthan where a huge salt formation is believed to exist. This however needs to be investigated further) in which we can store crude oil or petroleum products. We however do have natural gullies / small valleys and undulating landscapes which could be used as natural storages which require minimum soil and rock excavation. When done on a large scale the costs could be very low.

The engineering solution chosen usually depends on the storage method selected (land based /sea based). For the purpose of this project however, only land based storage is being considered as the life cycle costs and maintenance expenditure required is considerably lower.

For land based projects again, the optimum design will depend on the geology, permeability and settlement of in –situ soils, ground water levels and size and type of tank. The design will also depend on the type of product to be stored.

The engineering schematics below pictorially convey what is involved. Schematic A appears best suited to Indian conditions and might be the lowest cost option available especially if done on the large scale that is envisioned. If built on degraded land, after construction, we can cover the site with soil and build 30,000 – 45,000 acres of rich forest cover on it. The concrete storage tanks also provide large scope for innovation as instead of steel we could use carbon fibre, which has far greater tensile strength than steel as reinforcing material in the concrete. It also has zero corrosion problems. The site could also use recycled plastic as fill material on a truly massive scale. This could therefore be the largest environmentally friendly project globally.

Earthquake risk is minimal since the tanks have a special long lasting polymer fabric lining both the inside and the outside which provides effective containment.

Engineering Solutions for Strategic Storage

Project Cost Estimates

Approximate project cost calculations below exclude the cost of land.

Project Protection

The project is proposed to be located near Mangalore on the west coast of India. Advanced naval ordinance, including naval aviation units working out of the large Indian naval base at Karwar, 270 Km to the north will be responsible for the protection of the strategic reserves marine assets. Missile units of the Indian Army will secure the underground facility which will be located in the hinterland.

Environmental Issues

Since the storage itself is going to consist almost completely of underground storage tanks, it will have no adverse impact on the environment as the containment is secure against even earthquakes. The marine part of the project (SPMs and underwater pipelines) are standard equipment and have a proven safety record.

Project-Capex-CalculationThe project overall will be designed to be net – net positive to the environment as some 30,000 – 45,000 acres of new forests will be grown at different locations based on where large tracts of degraded forest / land is available.

Forward Path

There are no major show stoppers that could come in the way of making the reserve as conceptualized above a reality. Getting the initiative off the ground quickly is important and for this it is essential for the Ministry of Petroleum and Natural Gas to work with the Finance Ministry and the Prime Minister’s office to get a high level team of energy industry experts to visit countries in the Persian Gulf to get their oil ministers on board. The role of the Ministry of Finance in this project is critical and it is hoped that since the financial outflow and budgetary impact of the project (especially SPV1) is extremely low, they will find the project worth supporting as the scheme has solved the fundamental problem of financing the reserve.

“Determine that a thing can and shall be done, and then, we will, find a way”

— Abraham Lincoln

Rate this Article
Star Rating Loader Please wait...
The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Ashish Puntambekar

is lead designer at the Design Lab in Mumbai. He is the chief planner of the Defence Economic Zone project with 23 years of experience in large Infrastructure project design.

More by the same author

Post your Comment

2000characters left