Government-run petroleum firms and policy for compensation for under-recoveries
Democratic ideas and business strategies sometimes do not go hand-in-hand. A similar storm has hit the country's oil and gas sector. On one side, government-run petroleum firms are waiting for a transparent policy for compensation for under-recoveries, while private players expect a level playing field for fuel retailing. But both look unlikely to see the light of the day anytime soon.
Oil marketing companies (OMCs) are in no condition to handle the burden of extra duties. Therefore, the government last month hiked the prices of petrol by Rs 2.71 per litre and diesel by Rs 2.55 per litre. This is an aftereffect of Mukherjee's budget that has restored the basic duty of 5 per cent on crude petroleum, 7.5 per cent on diesel and petrol and 10 per cent on other refined products. He also increased the central excise duty on petrol and diesel by Re 1 per litre each.
Duty impact
The new duties on crude oil and other petroleum products will help the government earn nearly Rs 6,000 crore. The Congress-led government has justified the upward revision in fuel prices by saying it is inevitable to finance development projects and pursue the 8.5 per cent growth agenda. The recent price hike didn't make any difference to oil firms. "The present hike in petrol and diesel prices is the result of an increase in custom duty on crude and custom and excise duty on these products. Because the full impact of the hike has been passed on to the end consumer, this is largely neutral to the financial health of the oil companies, and the status quo continues for them," said Dilip Khanna, partner (oil and gas) at Ernst & Young.
Also, the opposition's uproar made no real difference to the United Progressive Alliance-led government. On Friday Ram Naik, the former petroleum minister during NDA regime, had expressed his unhappiness in an article in an English newspaper by saying, ".When the NDA was in power, we had actually evolved a scheme by which we had brought, by April 2002, petrol and diesel under price control in a particular way. Every fortnight, we looked at the international prices of crude, and if they increased, we would increase the prices of petrol and diesel, and vice versa...When the new government took over, the earlier petroleum minister Mani Shankar Aiyar and then Murli Deora both said that they would bring out a policy for petroleum pricing. But that just hasn't happened even after all this time."
The much bigger problem -- non-existence of a transparent policy for state-owned marketing companies - persists. The price of four important fuels - petrol, kerosene, diesel and cooking gas are determined by the Union government. The country's largest OMC, Indian Oil Corporation (IOC) and its peers - Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) - are losing Rs 196 crore everyday by selling fuel below market cost. IOC, with a market share of nearly 55 per cent, is incurring a loss of Rs 107 crore daily. At present, petrol is sold at a loss of Rs 4.97 a litre, diesel at Rs 3.27 a litre, kerosene at Rs 16.91 a litre and cooking gas at a loss of Rs 267.39 per 14.2 kg cylinder.
In the present financial year, it was decided that losses incurred on petrol and diesel will be compensated by upstream companies - Oil and Natural Gas Corporation Limited (ONGC), Oil India Limited (OIL) and GAIL (India). On the other hand, under-recoveries in kerosene and LPG (liquefied petroleum gas) will be compensated by government. Mukherjee has promised cash compensation of Rs 12,000 crore but the total losses is close to Rs 30,000 crore. No decision has come to light on ways to compensate for the total losses. Interestingly, government has appointed three high-level panels to study and bring out a framework for deciding petroleum prices, the latest one being chaired by former Planning Commission member Kirit Parikh.
Parikh recommendations
Parikh in his report recommended deregulation of auto fuel prices and increase in LPG by Rs 100 per cylinder and kerosene by Rs 6. Petroleum minister Murli Deora is leaving no stone unturned to improve liquidity of cash-strapped state-run oil companies. He is all set to decontrol prices of auto fuel and pass on a minimal hike in kerosene and cooking gas prices. But, with Mukherjee levying duties and the subsequent price hike pushed Deora's plans to the backburner. After the Union budget, Deora said some decisions on Parikh's recommendations will be taken in a week's time. But there are clear indications from North Block, as well from the petroleum ministry, that plans for further reform in the pricing of petroleum products and also the proposed hike in the price of gas produced from nominated fields have gone to cold storage.
"What is perplexing is, if the government is willing to risk the political fallout of raising prices, why does it not free the prices and let them be market determined?" Parikh told Financial Chronicle after the budget.
"Petrol and diesel prices were hiked to offset the duty increase (budget) on crude oil and products. We believe this would significantly expand uncertainties in the sector because we are still in the under-recovery zone and further price increases may be extremely difficult," said Niraj Mansingka, analyst at Edelweiss Securities. Having a transparent framework for the setting of these prices is very important to create a level playing field for the public and private sector and also to improve investor sentiment in the sector, said Khanna. Government-run companies such as IOC, BPCL and HPCL have gone back to their drawing board and are extra cautious on their expansion plans. Non-clarity on compensation of under-recoveries has hit company's liquidity, said B M Bansal, chairman of IOC. Private fuel retailers such as Reliance Industries (RIL) and Essar Oil are forced to sell petrol and diesel almost at par with government companies. They were expecting a level playing field because of absence of any cushion from increase in global crude prices. "While the changes in the duty of crude and petroleum products will have some negative impact on the profitability of the domestic refineries, there are clear cut sign of a move towards deregulation in the auto fuel sector, which will have a positive impact on private sector marketing companies," said Naresh Nayyar, managing director and chief executive officer of Essar Oil.
Indian simple gross refinery margins (GRMs) eased to $1.6 per barrel from $1.9 per barrel last month, while complex GRMs followed a similar trend by easing to $8.1 per barrel, Edelweiss Securities said in its March 4 report. In a submission to Kirit Parikh Committee, ONGC suggested that retail prices of petroleum products should be calibrated with the international prices of crude oil and petroleum products and rupee-US dollar parity up to a specified level for crude prices, said R S Sharma, chairman and managing director of country's largest public enterprise ONGC. It was further suggested that beyond the specified level, all stakeholders should share total under-recoveries in an equitable manner.
In case any such scheme is implemented, the share of the central government shall be reduced to large extent, which can be compensated in cash from the Union budget, Sharma added.
According to the International Energy Agency (IEA) forecast, there is a possibility for oil demand to increase by about 1.5 million barrels per day in 2010, which is a 1.7 per cent increase from the total world consumption of nearly 85 million barrels per day in 2009. India shares close to 4 per cent of the total global crude consumption. India's production mostly comes from nominated and pre-new exploration licensing policy (NELP) fields. These fields are decades old and production from ageing fields are dipping. India, which imports close to 80 per cent of its crude, needs new oil and gas producing assets. Only RIL's has brought NELP to fields in the Krishna Godavari Basin.
"We intend to increase the global recovery factor to 40 per cent by 2020 and these matured fields will continue to contribute for a sufficiently long period," said Sharma. Besides prudent reservoir management practices, it has been our endeavour to bring new discoveries to production at the earliest. At the same time, we are focusing on expeditious monetisation of marginal fields. Over the next two years, G-1 field on the East Coast, B-series fields (eight fields) and C-series (eight fields) on the West Coast will be brought onstream. These fields will be producing 42 million tonne of oil equivalent (MTOE) over 15 years, chairman of the country's largest oil explorer added. Production of more natural gas will help India move towards energy security. But absence of adequate pipeline network hampers equal distribution of gas. For development of the sector, the government proposes to empower the Petroleum & Natural Gas Regulatory Board (PNGRB) to authorise companies that can bid for city cooking gas supply contracts.
Stock performance
Year-to-date, the BSE oil & gas index is down 6.72 per cent compared with a 2.69 per cent fall in the BSE Sensex. All the oil stocks in the 10-member index have given negative returns during this calendar year.
Stocks of BPCL and HPCL have plummeted 14.65 per cent and 12.75 per cent this calendar year after the duty hike. Following suit, shares of ONGC, RIL, RNRL and Cairn India have plunged 7.29 per cent, 7.01 per cent, 5.61 per cent and 4.73 per cent, respectively. Aban Offshore, Gail, Essar Oil and IOC have dipped 3.49 per cent, 1.05 per cent, 3.11 per cent and 0.41 per cent, respectively.
(With inputs from Amit Mudgill)
Rajesh Abraham / Financial Chronicle newspaper.
