S Sundareshan, secretary in the ministry of petroleum and natural gas, has often been in-charge of executing radical changes in state policy in his 34-year long career. This includes the trade liberalisation programme of the government in the early nineties in the capacity of joint chief controller of imports & exports and subsequently in implementing the disinvestment programme as a joint secretary in the finance ministry. Sundareshan is now steering the petroleum ministry’s efforts to reform the auto and cooking fuel-pricing regimes and to bring in uniformity in the consumer price of natural gas? both having a significant impact on the second-fastest growing major economy in the world. Sundareshan spoke to Gireesh Chandra Prasad and KG Narendranath of FE on these topical issues. Excerpts from the interview:
Despite the occasional volatility, if average crude oil price stays at about $80 a barrel in 2010-11, would it affect the fortunes of state-owned oil retailers seriously?
Oil prices are extremely high. If the average oil price for the whole year is $80 a barrel, the under-recoveries would extremely be high and I would project it at over Rs 1 lakh crore. This is something, which is really disastrous for the oil marketing companies (OMCs) and is a burden that they cannot bear.
The finance ministry has said it will give cash subsidy to OMCs instead of oil bonds, but has not yet fully compensated retailers for last year’s under-recoveries. How do you propose to bridge the gap?
In the financial year 2009-10, the under-recovery is projected at Rs 45,000 crore. The under-recovery on account of petrol and diesel is to be borne by the upstream companies ONGC, Oil India and GAIL India. That would be of the order of Rs 15,000 crore, which they have already paid to the OMCs as committed. The same on account of domestic LPG and (public distribution) kerosene is to be born by the government. We estimate this to be of the order of 31,000 crore, of which Rs 12,000 crore has been provided in the last year’s Budget’s final supplementary demands for grants passed by Parliament. We still have a gap of about Rs 19,000 crore, which we will take up with the finance ministry. Normally, a decision on this is taken in May as has been done in 2007-08 and 2008-09. We are hopeful of a favourable decision.
If oil price stays high this fiscal, what is the solution? Can retailers absorb the revenue losses?
Insofar as 2010-11 is concerned, there are only two alternatives. We have to take hard decisions in terms of price rise or we have to change the target that we have set for ourselves for fiscal deficit if additional money is to be provided from the budget. The year has just started and the government would take a view on this in the next few weeks.
What would be a comfortable price range for crude for oil retailers?
Oil price at $80-81 is too high. It should come down. Oil price at $60-70 is comfortable. Beyond $75 is unmanageable. The point is that the subsidy that has been approved (Rs 12,000 crore) is for 2009-10. The question before the government now is to decide on the subsidy for 2010-11. We have on the table, the Kirit Parikh committee’s suggestions. Let me reiterate that there are only two alternatives before the government. One is to have rational pricing of petroleum products. The other is to change the target for fiscal deficit that we have set for ourselves. There is no third solution to this.
Can’t the government explore the possibility of rationing motor fuels, rather than hiking prices that could amount to an administered inflation when prices are already high? After all, demand for petroleum products is not particularly price-elastic to cause a reduction in oil import bill.
I do not think that as the economy is growing, the demand for products can be curtailed by artificial means. As the economy progresses, raising the aspirations of people to have a better living and better vehicles, demand for fuel will only increase. So, there has to be reasonable pricing of petroleum products. Consumers have to be prepared to pay for what they are consuming. The government can have schemes to subsidise fuel for the poorer sections of the society. That is a separate framework altogether. So far as OMCs are concerned, they cannot afford to bear this burden. The only choice is to increase the prices or to get subsidies from the government. If the government decides to subsidise, we have to change the course for fiscal consolidation.
Are the recommendations of the Parikh committee on sustainable pricing of petroleum products under consideration?
As I already said, the burden sharing mechanism for 2009-10 is already in place and what is necessary are decisions for 2010-11 and for the future. The Parikh panel report is very much on the table. That is one alternative. I am sure the government will take a view on it soon.
The Kirit Parikh committee had recommended that the Centre should reduce the allocation of kerosene to states, where the dependence on it has reduced because of rural electrification and greater availability of LPG for cooking. Any decision on that?
We would take a view on it shortly.
The President had, in her address to the nation last year, said the government would pursue oil diplomacy aggressively. There was also a proposal to set up a sovereign fund to acquire energy assets abroad. What has the government achieved on these fronts?
In the current year, we have already finalised the acquisition of a field in Venezuela at a cost of $ 2.1 billion. In the rest of the financial year, I expect that ONGC Videsh Ltd (OVL) will be able to do one or two more deals. Obviously, resources are limited. This is not an open-ended book that you can continue buying assets without a limit. Performance of OVL has so far been extremely creditworthy. They have invested over Rs 52,000 crore abroad. It is perhaps the largest foreign investment by any company in the country outside. They are producing around 9 million tonne of oil or oil equivalent and about 7 million tonne of oil, which is nearly 20% of the country’s production. The target for OVL is to buy producing assets in oil but I do not see more than one or two asset acquisitions in the course of this financial year considering the Venezuela deal that is already done. Insofar as the sovereign fund is concerned, that is something, which is for assets in all categories including oil, coal and iron ore.
When will the ministry be able to implement gas price pooling as proposed by panel of GAIL India?
One of the things that I said as soon as I took over was that we require uniform pricing of gas irrespective of their production sources. Gas produced from different sources such as K-G D6 and Panna Mukta and Ravva fields, are in a different pricing regimes. And the administered pricing mechanism (APM) gas of about 40 million standard cubic metre is available at a much lower price. The first step is to have approximately uniform price for domestic gas irrespective of where it is produced from. This is not arithmetic equality in price. The first step towards this is to have rational pricing for APM gas. We are at the final stage of decision-making on that. With that, the commitment of introducing approximately uniform pricing of gas, irrespective of the sources, will be met. The second larger issue is pooling of gas, which will have to take into account the price of liquefied natural gas (LNG) that is imported at a far higher price. That involves the completion of the pipeline network all over the country. So the pooling of price and the uniform price will take a couple of more years to be resolved. First of all, we need gas pipelines to be in place.
How close are we to a robust cross-country national gas transport infrastructure?
Gas is available in the West and the North, while it is not available in the South and the East. So we are on a massive programme of building pipelines. Gail is building a Dabhol-Bangalore pipeline. The Cochin-Mangalore pipeline is being built by them along with connectivity to Bangalore. Gail is strengthening its northern network. They are also building a Haldea-Jagdishpur pipeline. Reliance has been authorised to build a Kakinada-Haldea pipeline. Then, they are going to have a pipeline from Kakinada to Chennai and from Chennai to Tuticorin and Chennai to Bangalore. All this will be completed before the end of 2012. At that stage, if a particular geographic region, say Kerala, where only LNG is available and at a high price, then we would have to think about a pooling mechanism. So the first step I want to achieve is approximately uniform pricing of domestic natural gas irrespective of the source. And after a year or so, enter into discussions to include LNG too in the scheme.
Will state-owned natural gas producer ONGC benefit from the proposed approximately uniform pricing of gas?
Yes, to the extent of Rs 3,000-4,000 crore.
What is the progress in amending the Petroleum and Natural Gas Regulatory Board (Board), the city gas pipeline network regulator, to make it functional?
It is very unfortunate that the PNGRB could not function for various reasons. A comprehensive amendment of the PNGRB Act would take a long time to implement. We cannot afford to wait that long. We are working out a different solution, which I shall talk about after a few weeks.