The Hindu Business Line : Oil & gas sector: Reform is the way to go

The Prime Minister should pay heed to the suggestions of the House panel in allocating more funds from the revenues of this sector for its development, instead of bemoaning lack of resources for subsidising energy products.

G. Srinivasan

New Delhi, Nov. 13 The Prime Minister’s assertion that the Government will not cut petrol and diesel prices till the oil marketing companies (OMCs) break even on auto fuel sales is a pragmatic approach to managing the country’s fragile energy security, given the lack of resources to produce energy from different sources and demands being made to tackle slowdown of the economy.

In the wake of the recent tumble in crude oil prices from their elevated levels of close to $142 a barrel to a level of $60 or below, the demand for rolling back the prices, backed by some political parties for partisan purposes, has been strident in recent days. At the height of relentless rise in global crude prices, the Government hummed and hawed for too long before effecting a ‘marginal increase in the retail sale prices of petrol, diesel and domestic LPG (gas) by Rs 5/litre, Rs 3/litre and Rs 50 for a 14.2 kg cylinder respectively from June 5.

Meltdown effect

The slide in global crude prices from their stratospheric level began only in the last couple of months, since the onset of the global financial market meltdown and a looming recession in developed countries. The fall in crude prices followed the general downtrend in commodity prices the world over and this got further accentuated by the apprehension of a slowdown in manufacturing activity across countries, which is turning out to be real than apparent.

The public sector OMCs source their products from the refineries on import parity basis which then becomes their cost price and the difference between the cost price and the sale price signified the under-recoveries of the OMCs. The under-recoveries of OMCs on marketing of sensitive petroleum products differ in sync with movements in the global oil prices. The under-recoveries for 2008-09, originally estimated at Rs 2.45 lakh crore in June 2008 when the global crude prices ruled the highest, are currently estimated at Rs 1.47 lakh crore based on the prices of the second half of October 2008. Even as crude prices have been falling, the gargantuan under-recoveries of OMCs in cross-subsidising domestic consumers made Dr Manmohan Singh to concede that “oil companies have to bear a very heavy burden. There are limits to which Government can go on subsidising”.

Subsidy scheme

The kerosene price, for instance, has hovered at around Rs 9.05/kg since 2005 and the government has extended the PDS kerosene and domestic LPG subsidy scheme 2002 and freight subsidy (for far-flung areas) to March 31, 2010. The point to ponder is on each litre of PDS kerosene during the year 2007-08 (April to December 2007) the subsidy was Rs 16.02, of which the oil companies bore Rs 15.20 and the contribution from the Government budget was 82 paise. In case of domestic LPG, the per cylinder subsidy amounted to Rs 201.67 during the reference period, of which the contribution from the government budget was Rs 22.58 and the amount borne by the oil companies was Rs 179.09.

A recent House Panel report of the Ministry of Petroleum & Natural Gas states that a massive amount of Rs 73,250 crore was collected by the Government from the cess slapped on indigenous crude since the introduction of the Oil Industry (Development) Act, 1974 till end-December 2007, out of which a paltry sum of Rs 902.40 crore was disbursed to the Oil Industry development Board (OIDB). The revenue gleaned from the oil sector in terms of customs and excise duties in 2004-05, 2005-06 and 2006-07 had been as much as Rs 54,738 crore, Rs 61,221 crore and Rs 68.864 crore respectively. Against this, the amounts released by the Government through oil bonds and fiscal subsidy on domestic LPG and PDS kerosene was Rs 2,956.34 crore, Rs 14,182.96 crore and Rs 26,727.17 crore during the same period. In fact, the panel sought the Government to refer the entire issue of deployment/utilisation of cess levied on crude oil/revenues gleaned from the petroleum sector vis-À-vis the amounts released to the sector to a Group of Ministers from finance, law, chemicals and fertiliser and petroleum and natural gas.

Energy experts too want the Government to invest in exploration and production of oil or use the latest technology to find new oil in deep water/ultra deepwater areas. The Prime Minister should pay heed to the suggestions of the House panel in allocating more funds from the revenues of this sector for its development, instead of bemoaning lack of resources for subsidising energy products. He should also consider implementing some of the far-reaching recommendations of the Chaturvedi Committee that would help the OMCs from being burdened heavily with the social cost of cross-subsidy. The moot question is whether the Prime Minister has the political pluck to prise open the window of reforms in the petroleum sector on lines suggested by the various committees in recent past?

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