The petroleum ministry has sought the Cabinet's approval for setting up five million tonnes of strategic crude reserves in the country.

The cost of the project is estimated at Rs 1,225 crore  (Rs 12.25 billion). The cost of five million tonnes of crude will be Rs 5,200 crore  (Rs 52 billion), assuming crude prices of $25 a barrel and an exchange rate of Rs 49 to a dollar, the Cabinet note says.

At an investment rate of 10 per cent, the carrying cost of five million tonnes of crude will be Rs 520 crore  (Rs 5.20 billion) per year. Besides, the annual operating cost of the strategic reserves has been estimated at Rs 29 crore (Rs 290 million).

The five million tonnes of crude storage is equivalent to about 15 days of refining capacity in the country. The petroleum ministry says based on the experience gained, the storage could be increased in phases to achieve a 45 days' cover.

The ministry is of the view that maintaining crude reserves is preferable over product inventories since India has adequate refining capacities and maintaining product inventories will make the available capacities idle.

Operating the refineries is also expected to render products more cost-effective than imports.

The petroleum ministry is also sending a high-level delegation to the US by the month-end to study the strategic crude reserves there.

The delegation comprises the director-general of hydrocarbons, a joint secretary from the petroleum ministry, two directors of Indian Oil Corporation and a director of Engineers India Ltd.

A detailed feasibility study on the strategic reserves has identified three locations, including Rajkot in Gujarat, where 2.5 million tonnes of crude could be stored.

At Mangalore in Karnataka, the government will build a strategic storage for 1.5 million tonnes of crude and at Visakhapatnam in Andhra Pradesh, the reserves will store 1 million tonnes of crude.