Oil & Gas reforms on front burner

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M Veerappa Moily, petroleum minister M Veerappa Moily, petroleum minister
SummaryThe UPA government is going the whole hog on its plan to move towards fully market-determined pricing of diesel, which accounts for 60% of this year’s estimated fuel subsidy bill of Rs.1.7 lakh crore.

Free-market diesel price in 24 mths; only LPG, kerosene to get subsidy

The UPA government is going the whole hog on its plan to move towards fully market-determined pricing of diesel, which accounts for 60% of this year’s estimated fuel subsidy bill of R1.7 lakh crore. “In 24 months from now, everyone will pay market price for diesel, and we will have fuel subsidies only on LPG and kerosene,” a determined oil minister Veerappa Moily told FE. This is the first time the minister has said this categorically, setting at rest speculation after last week’s government directive to oil marketing companies (OMCs) on diesel pricing on whether it meant deregulation and abrogation of diesel subsidy.

The government has also firmed up a slew of reforms in the oil and gas sector to spur investments. India’s hydrocarbon industry has seen a dampening of investor sentiments in recent years due to various unresolved policy questions: mounting under-recoveries of OMCs and disputes over how oil and gas producers share their profits with the government, to name just two.

Ruing OMCs’ heavy borrowings of R1.5 lakh crore, the minister said: “We have $160 billion of crude imports a year which is 30% of all imports. Of this, $30 billion are under-recoveries which are making our oil companies bankrupt. Can this continue?” He reiterated that oil companies would calibrate the increase in diesel prices, adding that the delivery of LPG subsidy by way of direct cash transfer using the Aadhaar platform will start in 20 districts by mid-February. The minister said he would write to all CMs, asking them to cut taxes as far as possible to mitigate the impact of the phasing out of subsidy on diesel. “Much more than inflation, the macro-economic stability at stake today is what provided the context for the diesel price hike,” he said. Currently, central and state taxes account for 31% of the retail price of petrol in Delhi, and a little over 10% in the case of diesel. LPG does not attract taxes.

Moily said his ministry has just prepared a Cabinet note, endorsing the Rangarajan panel’s proposal that all future oil and gas contracts will be based on a simple revenue-sharing criterion, without regard to cost recovery.

The oil ministry, he said, was going to soon place before the newly set-up Cabinet Committee on Investments (CCI) proposals to fast-track approvals for over 20 offshore exploration blocks which have not got defence ministry clearance for a long time, despite production sharing contracts being signed by investors. These are among 52 blocks awaiting defence/environment clearances where Indian and foreign companies have already invested $12.4 billion. India is holding back clearances for more than a fifth of the exploratory blocks it has auctioned in various rounds since 1999 to domestic and overseas energy explorers due to defence, environmental and maritime boundary issues.

Last Thursday’s one-liner from the oil ministry to the three state-run OMCs had merely allowed them to make “small price corrections (in retail diesel prices) from time to time.” Apparently acting on oral directions, the companies raised prices by about 50 paise the same night, reducing their under-recoveries on the fuel to Rs 9.1/litre. The OMCs later said the correction in retail price, along with price deregulation of bulk diesel, would reduce their under-recoveries by some Rs 15,000 crore on “annual basis,” but pleaded ignorance on whether there would be similar corrections in retail prices for every month till the under-recoveries on the fuel are nullified.

For domestic LPG and kerosene, under-recoveries stand at Rs 490.50/cylinder and Rs 30.64/litre respectively. OMCs incur daily under-recoveries of about Rs 380 crore on the sale of diesel, kerosene and domestic LPG.

The government reckons that once both petrol and diesel are deregulated completely, private oil companies which have idled their retailing network and deferred expansions, would start investing heavily. Market-determined pricing for bulk consumers, which account for a fifth of diesel consumption in the country, might prompt firms like Reliance and Essar to venture into the market.

Sources said the finance ministry, in parallel, is considering shifting to 100% export parity formula for estimating under-recoveries of oil companies, a move that would reduce the OMCs’ under-recovery claims. (The current trade parity pricing combines import parity and export parity in the ratio of 4:1 to decide the refinery-gate price due to OMCs. The mark-up of trade parity over export parity is about 5%).

While the export and import prices don’t vary too much, the import-parity price (landed cost) – which includes tariffs, duties akin to domestic products and transportation charges – works out to be higher than the export-parity price, which is exclusive of import tariff (basic customs duty) and transportation (port and shipping) charges. So, a shift to 100% export parity pricing would mean a reduction in under-recoveries as approved by the finance ministry and correspondingly lower subsidy payouts.

The 2006 Rangarajan committee, which proposed trade parity pricing contended import-parity pricing amounted to allowing OMCs to enjoy a rent akin to ocean freight and associated costs while export-parity price would put domestic refineries, especially PSUs, at a disadvantage. “Effective benefit from import duty protection and various notional expenses amount to about 4-5% for OMCs on the key products, impacting GRMs by about US$3/bbl which they stand to loose in case of full export parity pricing,” according to Emkay Global Financial Services.

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