Column A level playing petro field

Written by Puneet Singh | Updated: Jul 31 2008, 06:07am hrs
Prime Minister Manmohan Singhs realpolitik on the oil price hike has virtually been buried, within a few weeks, under the avalanche of reports on the escalating prices of politically sensitive petroleum products (PSPPs).

The realpolitik was embedded in the PMs decision to constitute a high-powered committee on financial position of oil companies and its last terms of reference. The announcement, which coincided with price hike, said that the committee would examine the available options for burden sharing by all stakeholders, including upstream exploration companies, refiners, downstream OMCs (oil marketing companies) and stand-alone refiners.

This mandate at that time was a subtle attempt to woo the Left which was vociferously demanding levy of windfall tax on private refiners to raise additional money for subsidising PSPPs. Although the Left has withdrawn its support to the government, the latest ally of UPAthe Samajwadi Partyis voicing the same agenda.

Opinion leaders of all hues would tend to agree with the contention that there should be a level playing field for the sake of competition which even ONGC has been pleading for. To quote ONGCs latest presentation, the government is yet to increase the price of natural gas as recommended by the Tariff Commission. It thus continues to get $2.02 per million British thermal units (MBTU) as average price for gas, compared to $5.73/MBTU allowed to Panna-Mukta JV and $4.6/MBTU for Ravva JV.

Incidentally, ONGC holds 40% equity stake in both these unincorporated JVs. It is ironical to find ONGC getting market prices through the joint venture route and administered prices as a PSU.

Successive governments have maintained this price discrimination both for gas and crude oil, forcing ONGC to sell its crude at discount to PSU refineries. ONGC says the impact of discounts on the corporations net profit increased from Rs 2,553 crore to Rs 13,235 crore over the past three years. Other PSUs such as Gail have similar depressing stories to tell.

The widening price differential between subsidised products marketed by OMCs and unsubsidised ones sold by other PSUs and private operators turned consumers to the former group. This proved to be the perfect killer of competition and jobs, leave aside the fate of franchise owners of RIL and Essar Oil Limited (EOL) retail outlets. The reality about profits earned by private operators would also take the wind out of the claim by both these parties about super-profits and the need for windfall tax.

EOL has reported a loss before interest and tax (LBIT) of Rs 44.44 crore on marketing of petro-products valued at Rs 572.66 crore in 2007-08. Cairn India Limited (CIL) also reported a net loss of Rs 24.5 crore on consolidated income of Rs 1144 crore in 2007.

Videocon Industries, which has equity stake in Ravva JV, however, earned PBIT of Rs 442.72 crore on sale of crude oil and gas valued at Rs 1,410.19 crore in accounting year ending September 2007. The situation is similar in the case of RILs oil and gas division. It earned PBIT of Rs 1,503 crore on Rs 2,702-crore sales in 2007-08. However, these profits would not constitute even a drop in the subsidy ocean, assuming the government acts at the Lefts behest and imposes a windfall profit tax on them.

Assuming that the government acts on the SPs demand, it would also have to bring in RILs retail outlets under the subsidy regime. If the government does that, it would end up paying more to RIL than what it would get from the company as windfall profit tax. After all, RIL had earned a name for operating a world-class retail chain, whose each outlet sold several times more than its competitors. The move to impose a windfall tax would be self-defeating and punitive for producers.

The issue of level playingfield for all players in all business segments upstream and downstream is far more complex and daunting than what the Left and the SP wants the public to believe.

The author is studying public affairs at Boston University