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Thursday, May 16, 2002

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Opinion - Petroleum

The slick on the oil front

G. Srinivasan

The projected recovery in the global economy and the continuing political tensions and turmoil in West Asia have led to a firming up of oil prices. This is fraught with perilous implications for such import-dependent oil consumers as India unless it displays efficiency in using its oil resources.

THE dismantling of the administered pricing mechanism (APM) from April 1, followed by the introduction of a Bill in the Lok Sabha to set up a Petroleum Regulatory Board testify in ample measure the Government's resolve to reform the crucial oil sector. The avowed objective behind the Regulatory Bill for the petroleum sector is to ensure healthy competition and uninterrupted supply of petroleum products across the country.

Yet, all is not honky-dory on the oil front. After the IBP disinvestment, it was widely believed that the privatisation of the two remaining oil PSUs — Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — would gain speed, commensurate with the evangelist zeal of the Disinvestment Minister, Mr Arun Shourie.

But this was not to be as the Petroleum and Natural Gas Minister, Mr Ram Naik, has resisted the disinvestment in HPCL, citing the need for clinching procedural issues. Mr Naik's argument is that the strategy of disinvesting government holdings in the two oil PSUs to 26 per cent is not proper because as of now, the Government holds 51 per cent in HPCL and 66 per cent in BPCL. This asymmetry in holding would lead to under-valuation of HPCL, if the Government is to reduce its holdings in both at one fell swoop to 26 per cent. Whatever might be Mr Naik's argument to redress this anomaly and asymmetry, it has halted the process for selection of the global advisors in the disinvestment process.

That the administrative ministers get pangs and qualms at the eleventh hour of disinvesting their PSUs is by now a familiar sight. Currently, oil accounts for about 22 per cent of the primary energy consumption. While the demand for petroleum products has risen substantially, the upstream sector in India has lamentably lagged behind, provoking genuine concern for oil security over the long haul. Today, as much as 70 per cent of the total demand for petroleum products is met through imports with domestic crude accounting for the balance. It is, however, heartening that the policy of opening up the upstream petroleum sector to private participation has contributed to about 12 per cent to oil and gas production within a short span of two years.

It is germane to note that the Steering Committee on Energy, set up under the Chairmanship of Mr N. K. Singh, Member, Planning Commission, for the Tenth Plan (2002-07), has also plumped for maintaining core public enterprises, such as IOC, ONGC, GAIL with over 51 per cent government ownership and reviewing the status after five years. It has, however, suggested privatisation of all other entities within the next year, besides phasing out subsidies on kerosene (PDS) and LPG (domestic) over next three-five years and goading private investment in product pipelines.

On the contribution of natural gas for energy, it said this depends very much on new gas discoveries, materialisation of natural gas imports — both in the form of LNG and piped gas, and the price of imported gas vis--vis the price of alternative fuels, such as coal for power generation and naphtha for feedstock.

The Steering Committee is of the view that unlike in other utilities, there is only limited need for the regulatory body to attend to questions of fixation of market prices in the oil sector. Prices would be determined by the market as petroleum and natural gas are tradable commodities across national and international boundaries. But the regulatory body would be required to ensure that there is fair competition among all the players. The price mark-up for transport, distribution and marketing costs would have to be regulated and set at competitively determined levels. Another crucial role for the regulator is to ensure maintenance of a strategic minimum reserve of oil products, besides establishing quality specification and monitoring their compliance.

Freeing petroleum products prices from administrative fiats seems to have raised concerns among several stakeholders, including members of Parliament who, at a recent Consultative Committee meeting, gave vent to their concerns on this count. Even as the Government is supposed to lay off in determining the prices of petroleum products, the Minister reassured the MPs that the Government is constantly reviewing the global oil prices and as and when intervention is required, appropriate measures would be taken.

The Minister told the MPs that the crude prices of Indian basket increased to $23.33 per barrel in March and $25.02 per barrel in April, as against $19.34 per barrel on the basis of which petroleum product prices were revised on March 1, before the APM was dismantled. While the Government claims that appropriate measures would be put in place to check any alarming rise in prices in tandem with global levels, the members sought a mechanism to protect consumers against abrupt spurts in global prices of petro-products and the need for revision in prices by the oil companies at a fixed interval.

It is a classic case of having one's cake and eating it too. Now that the petroleum product prices would be increasingly determined by market forces with the APM having been brought down, how can the Government and MPs assure the consumers that a mechanism would be in place to protect their interests? Does it mean the authorities would always play a role to mitigate the harsh effects of market forces? Such flip-flop and unclear objectives may only lull people into a false sense of complacency in consuming precious energy at a time when conservation has taken a back seat.

It is also stated that post-APM, the private companies would be permitted in the distribution of petroleum products for which elaborate terms and conditions had been laid down. One of the conditions is that companies investing in or proposing to invest Rs 2,000 crore in exploration and production, refining, pipelines or terminals might be authorised to market transportation fuels — motor spirit, high speed diesel and aviation turbine fuel. It remains to be seen how many private players come forward to market the petroleum products and how efficiently they serve the consumers without forming oligopolistic alliances to exploit the scarcity value of the products in question.

Several vital loose ends need to be tied up before all players become proactive in marketing the petroleum products after duly satisfying themselves with the terms and conditions, including the Marketing Service Obligation of setting up two or three units in rural areas for every five units they set up in urban centres. Even as India has failed to get the world's oil majors to invest, with no major fields having been discovered after the Bombay High in 1976, would it not be too much to expect MNCs/private companies to be legally bound to put up facilities in far-flung and hilly areas in the same ratio as that of oil PSUs when granted marketing rights, as suggested by the Standing Committee of Parliament?

Such conditional freedom to market petroleum products by private players would render the dismantling of APM totally inopportune and infructuous because the business of the private operators is not to carry the cross of social obligation but to maximise returns on the investments they have sunk.

No doubt, the global oil scene has vastly changed in the past couple of years with the price of oil over the past two years displaying a stability and resilience not seen since the first half of the 1980s. It remained $24-30 a barrel from the first quarter of 2000 to the third quarter of 2001. Unctad estimates that global oil supply in 2001 is reported to have been 77 million barrels per day (bpd) or 0.1 million bpd above the 2000 level. OPEC supply fell 0.7 mbdp, but was substituted by a slightly bigger increase in non-OPEC production. There was a slowing in the growth in world oil demand, following an increase of 0.7 mbpd in 2000 it rose by only 0.1 million bpd — the minutest year-on-year increase in over a decade.

This slowdown in the world oil consumption led to a rise in inventories in rich countries which has led to downward pressure on price, particularly in the second quarter of 2002.

But the projected recovery in the global economy and continuing political tensions and turmoil in West Asia has led to firming up of oil prices in recent weeks. This is fraught with perilous implications for such import-dependent oil consumers as India unless it displays efficiency in using resources, both energy and investment for oiling the wheels of its economy in its onward march.

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