The Prime Minister Narendra Modi-headed Union Cabinet on Wednesday approved a proposal that would overhaul the crude procurement process for government-owned refiners — — IOC, BPCL, HPCL and MRPL . The move is aimed to make the refiners more competitive like their private peers such as RIL and Essar Oil and take benefits of spontaneous buying of cargoes.
Telecom Minister Ravi Shankar Prasad said that the decision would offer autonomy and flexibility to the government-owned refiners.
“At times, there is a need to take decisions on spot…Today, the Cabinet has given the power (to state-run refiners) to evolve their own policy to procure crude oil to make it more flexible and dynamic… This offers a high degree of autonomy,” Prasad told media persons.
The board of PSU refiners such as IOC, HPCL, BPCL, and MRPL would have the power to decide on crude oil spot purchases without waiting for the long drawn tendering mechanism.
At the same time, the refiners could put in place an ‘integrated trading desk’ model and do-away with the tendering mechanism of procurement. The new model, already practised by global firms and private Indian refiners, could help in buying crude oil cheaper by nearly $3-5/barrel. Given the existing capacities of PSU refiners, their combined savings could be $3 billion per annum, said an official with one of the refiners.
In the new mechanism, integrated trading desk would be the platform to negotiate directly between the buyer and seller and also capture market opportunities such as buying distress cargoes.
The tender route approach for spot procurement currently adopted by PSUs restricts opportunities for quick decision making for buying and selling cargoes on perceived advantage. The trading desk approach involves traders continuously talking to market participants during the entire day. As and when opportunities arise, the traders can finalise deals without calling for tenders, said an official at a public sector refiner.
In May 2013, the Parliamentary Standing Committee also pointed out the need for better crude oil procurement mechanism. It said that PSU refiners should be given flexibility for carrying out negotiations including pricing, hiring ships and better terms on freight. In addition, the petroleum ministry should allow PSUs to procure certain percentage of their annual crude requirement through distress sale route, recommended the committee.
IOC, BPCL, HPCL and MRPL buy nearly 70-75% of their crude oil requirement via long-term deals, while remaining 25-30% is sourced from spot market, costing premium.