Consumers in India and global petroleum prices

Consumer can't be insulated from global prices for very long.

Second month into his tenure as petroleum secretary, S Sundareshan is in the middle of a situation where oil marketing companies are seeking an increase in prices as well as higher subsidy from the government. The two demands, so far, have failed to move the political class. In an interview with Ajay Modi and Jyoti Mukul, he says the Kirit Parikh report is alive and the government will take care of its companies. Edited excerpts:

What is your long-term view of the ministry on the petroleum sector?
The long-term outlook is extremely bright. First and foremost is our achievement in building refining capacity. We have already built annual capacity of 178 million tonnes (mt). Our domestic consumption is 135 mt. It is growing at a rate of 4-5 per cent. By 2012, we will build capacity to the tune of 255 mt. There has been tremendous achievement in terms of technology and risk-taking ability of the industry. After two-three years, 100 mt of petroleum products will be exported. In the public sector, three new refineries are coming up - Bhatinda by Hindustan Petroleum Corporation Ltd, Bina by Bharat Petroleum Corporation Ltd and Paradip by IndianOil. A private greenfield refinery is being built at Cuddalore. Essar refinery will be expanded.

So, in the foreseeable future, there is going to be no shortage of any petroleum product for want of capacity. The huge surplus would be used to the country's advantage.

In gas, the last year has been phenomenal in terms of increase in production. We are producing 60 million standard cubic metre a day more gas (total 142 mscmd) from 82 mscmd last year. This offers tremendous scope for increased supply to critical sectors. We also expect additional gas production from the discoveries of public and private sectors. Last year has been good as the facilities of a joint venture between Cairn and ONGC started production in Rajasthan and we hope it will produce 22 per cent more at its peak from the current level.

In terms of acquisition of oil and gas assets abroad, OVL (ONGC Videsh Ltd) has been doing a remarkable job. It has made investments of over Rs 52,000 crore in 39 projects and had revenues of Rs 18,000 crore last year, with profits of Rs 2,800 crore.

Considering the positive outlook, correct pricing policy is important. If prices are remunerative, there will be more investment, if not, more investment will mean more losses for the companies. What is the government's long-term outlook on pricing? Is the Kirit Parikh report on petroleum prices dead?
The oil marketing companies are losing over Rs 5 on every litre of petrol, over Rs 3 on diesel, Rs 16 on a litre of kerosene and over Rs 260 per LPG cylinder. It is impossible that the Indian consumer can be insulated from the movement of international oil prices. Ultimately, the consumer has to pay the price for what he consumes. The government could have a deliberate policy to subsidise the weaker sections, particularly kerosene and LPG, and a special scheme could be formulated for this purpose. A decision has to be taken in this regard. The Parikh committee report has offered certain suggestions, the basis of which is equity and sustainability. The government is examining the report.

When are you going with the report to the Cabinet? Is it that the hike after the Budget has made price increase on account of international prices difficult?
The decisions in the Budget are resource mobilization steps of the finance ministry and I have no comments to offer on that. The problem remains that in the current year oil marketing companies would have under recoveries close to Rs 45,000 crore. The under-recoveries on account of petrol and diesel (estimated at Rs 13,000-14,000 crore) will be absorbed by the upstream companies. The balance on account of kerosene and LPG have to be borne by the government. Already, Rs 12,000 crore have been released. So far as the balance is concerned, we are in constant touch with the Ministry of Finance and will have deliberations with them early in the next financial year once accounts are finalised. We are sure oil companies will be adequately compensated.

Is there any thinking on changing the burden sharing mechanism in the next financial year, especially with regard to the upstream companies?
First and foremost, there is absolutely no panic from the observers of the industry on this account. In 2007-08, under-recoveries were to the tune of Rs 70,000 crore, which was fully compensated; in 2008-09 it was Rs 103,000 crore, which was compensated by the upstream companies and the government. We have ensured that no investment proposal of oil companies suffer for want of funds. These companies are building new refineries, upgrading facilities and completing major pipelines. So, the oil companies have been able to sustain both activities and investment.

We have a formula on the basis of which we take decisions every year. The formula for the current period was known early in the year. For the last two years, it was that one-third of the under-recoveries were to be borne by the upstream companies. What is now required is a sustainable decision for the future. For 2010-11 and beyond, the Kirit Parikh report will be the benchmark. The government is studying it and the implications on various sections of the society. It is studying the need to subsidise the weaker sections and not subsidise the better-off. A decision will be taken keeping all these into account. There were reports that IndianOil wants to raise more funds through sale of shares. At one point, it sold some of its crossholdings to fund expansion. Is there any fresh proposal from any of the companies?
They have not sought permission. Such a requirement will be considered by the boards of respective companies. There is no proposal as of now.

Is there any proposal for disinvestment in oil PSUs?
There is no scope for disinvestment in HPCL, BPCL and GAIL since the government holding in HPCL and BPCL is 51-52 per cent and in GAIL, it is 57 per cent. For IOC and ONGC, there is no proposal under consideration at this juncture.

What about Engineers India Ltd, which has a Cabinet approval in place?
The process is on and it is likely to be kicked off in the next couple of months.

There are talks about a sovereign fund for acquisition of assets. Is there any such proposal from the ministry?
OVL will continue to acquire assets abroad. Clear directions have been given to OVL to go for a couple of major acquisitions in the next fiscal. OVL's acquisition has not been hampered due to lack of funds. So far as a separate fund is concerned, it could be in the context of the need of the country to acquire assets not only in area of hydrocarbons, but also in other raw material assets such as coal, iron-ore, etc. We have written to the finance ministry a few months back. It is a general idea at this juncture and contours have to be finalized if found acceptable by the finance ministry.

The ministry had plans to set up a national gas highway authority. What is the current status? Will the creation of such an authority lead to the Petroleum and Natural Gas Regulatory Board losing its power of authorization?
The government is committed to having a network of gas pipelines across the country to ensure availability. Currently, availability is largely restricted to the western and northern regions. South and East are starved. PNGRB can authorise new pipelines, which it has not been able to do due to various reasons. We have to resolve this issue and find a way for providing authorization for more pipelines. One way of doing it is the gas highway authority and in that context inter-ministerial discussions are on.

When can we expect a revision in APM (administered price mechanism) gas prices? Will the ministry also go for a uniform gas price along with the revision in APM prices?
It has to be realized that monumental reforms like uniform gas price are not done overnight. One of the priorities that I have is that there should be uniform price for gas in the country. The first step was to increase the price of APM gas and a proposal in this regard is in the final stages of government decision-making. One of the ideas to ensure that consumers pay similar prices is pooling of gas. But it is a new idea and a complex task, which will have its repercussions for decades. We will study it carefully and come to a decision in course of a few months.

Q&A: S Sundareshan, Petroleum Secretary.....by.....Ajay Modi & Jyoti Mukul / Business Standard newspaper.