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Whether it was the flamboyant Mani Shankar Aiyar or the restrained Murli Deora, handling the volatility in oil price remained a challenge for both Petroleum Ministers. The Government’s response was to continue with retail price control. That left the oil marketing companies (OMCs) in a bind. But votes mattered more.
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The simple fact is that India imports 80 per cent of its crude oil needs. So international oil prices play a decisive role in the domestic retail prices of the refined products namely, petrol, diesel, cooking gas, and kerosene sold under public distribution system.
The Government’s policies ensured that the OMCs would earn less than they would have had prices not been controlled. This phenomenon was given an innocuous name – under-recoveries. It affected petrol, diesel, cooking gas, and kerosene because after 2004, international prices kept rising but the Government didn’t allow these increases to be completely passed on to the consumer.
The results were dramatic: at one point, public sector OMCs were losing over Rs 500 crore on a daily basis and were estimated to lose over Rs 2,00,000 crore annually.
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The Indian crude basket, or the price at which India buys its crude, which averaged $23 a barrel at the time the Administered Price Mechanism was dismantled in March 2002 and $36 a barrel in May 2004, averaged about $79.25 during 2007-08. When international prices breached the $145 a barrel mark, the Indian basket had gone up to an unprecedented $142.04 a barrel on July 3, 2008, subsequently plunging to a low of $35.83 on December 24.
However, despite the recent softening of international prices, the average price of the Indian basket was still high during the current fiscal (April 2008 to March 13, 2009), at $85.36 a barrel, against the average 2007-08 price of $79.25.
Burden-sharing
To ensure that the public sector OMCs – Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation – remain in good financial health, the Government devised a financial package. Private sector players such as Reliance Industries and Essar had to fend for themselves. And unable to compete with the public sector’s subsidised pricing they had to exit the petrol retail business.
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To deal with under-recoveries in the public sector OMCs, the Government has devised the principle of equitable burden-sharing. Under this mechanism the burden is equitably shared by all the stakeholders, namely, the Government through issuance of oil bonds, the public sector upstream oil companies such as ONGC and Oil India as well as GAIL (India) by way of discount on crude oil and petroleum products, and the public sector oil marketing companies by absorbing a part of the under recoveries. The least affected is the consumer.
ONGC, Oil India, and GAIL provided assistance of Rs 69,285 crore between 2003-04 to 2007-08. For the current fiscal the upstream companies have shared Rs 32,000 crore of burden. The total support provided by Government through oil bonds in 2005-06 was Rs 11,500 crore, which has been constantly increasing.
In 2007-08 bonds worth Rs 32,289.50 crore were issued. For the fiscal 2008-09, the Government plans to issue oil bonds worth Rs 75,942 crore. For April-December 2008 bonds worth Rs 60,967 crore have already been issued.
The fall in international oil prices has provided some relief to the OMCs as it means lower import costs. The Government passed on the benefit of falling oil prices to the consumers by reducing retail prices of petrol and diesel and domestic LPG.
It is estimated that the public sector OMCs will close financial year 2008-09 with under-recoveries of Rs 1,04,500 crore on selling petrol, diesel, kerosene and cooking gas below the market price. Gas
If handling the crude price was difficult, the issue of gas pricing was even more difficult. ONGC is still waiting for the Government to consider its demand for raising the price of gas sold under administered price. Selling gas at APM price has also impacted the company’s profitability.
A decision was taken last October by a high-level ministerial panel on price and priority sectors for gas to be sold from the D6 block awarded to RIL and its partner under New Exploration Licensing Policy (NELP) rounds.
The panel decided on $4.20/mBtu at the delivery point as the price. While crude oil production from RIL’s Krishna-Godavari Basin D6 block has commenced, supply of gas from the fields is expected by April 2009. The peak production from the block is estimated at 80 mmscmd.
Gas-based urea plants, LPG plants and power plants have been prioritised as beneficiaries of the initial 40 mmscmd of D6 gas. Gas would also be supplied to meet the requirements of piped natural gas and compressed natural gas.
NELP
Critics say that global majors, particularly US companies are still shying away from the oil and gas bidding rounds offered by India. In a recently concluded Seventh NELP round, production sharing contracts (PSCs) for 41 blocks were signed. NELP VIII is slated to be launched some time soon.
However, NELP VII came with its own share of complexities. Does definition of mineral oil include natural gas for taxation purposes? Yes, it does, say exploration companies, experts from the sector, and even the Petroleum Ministry. But what does the Finance Ministry say? The answer is still awaited.
Refining Capacity
The UPA tenure saw the largest FDI in the sector for setting up the Bhatinda Refinery, a Mittal-HPCL joint venture. The Government in 2007 approved Mittal Energy as HPCL’s JV partner for the 9-million-tonne-per-annum Bhatinda Refinery project. Mittal Investments is bringing Rs 3,506 crore (about five per cent of the total FDI in 2006-07) into the petroleum refinery sector in collaboration with a PSU.
The country’s overall refining capacity has increased to 178 mtpa from 127 mtpa in 2004. Of the 20 refineries operating in the country, 17 are in the public sector and three in the private sector – including RIL and Essar Oil.
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The Petroleum Ministry maintains that deregulation is a complex task. Currently, the Government controls fuel prices of PSU companies, while private players are free to fix their own tariffs. Critics term this a political decision. Experts say it depends on which side of table you are sitting – as consumers or oil companies.
While the Ministry continues to say “the Government is committed to protecting the interests of the common man as well as the financial health of the OMCs,” only time will tell how long it can continue to wear two hats.
