Its A Tightrope Walk For The Petroleum Minister

Updated: Aug 31 2004, 05:47am hrs
Petroleum minister Mani Shankar Aiyar has been in the news for reasons other than policy initiatives in the sector. His recent comments on Veer Savarkar held up Parliament proceedings during the latter half of the Budget session. Unperturbed by these developments, Mr Aiyar has been meeting bureaucrats and oil PSU chiefs, discussing the impact of global oil prices on the Indian economy.

India imports 70 per cent of its crude oil requirement, and it does not need the sophistication of rocket science to conclude that global oil price is a very important factor for determining the behaviour of the economy. The price upsurge started with political turmoil in some oil-producing countries like Iraq, Nigeria and Venezuela and the threat perception regarding supply disruption due to terrorist activities in the Middle East.

For an oil-importing economy like ours, higher oil prices lead to higher inflation, increased input costs, besides reduction in general demand in the non-oil sector. In this backdrop, it is indeed a tightrope walk for the policymaker in the net oil-importing country.

Following detailed discussions at the top level, Mr Aiyar, during his first 100 days as petroleum minister, came out with a new pricing policy for petroleum products (petrol and diesel) to protect consumers from the impact of spiralling oil prices in the international markets. A price band mechanism was introduced, and changes in consumer prices were restricted to a 10 per cent variation within the band.

During August 2004, global prices were at an all-time high, with the average price of the Indian basket of crude being $41.02 per barrel. As global prices continued to move upwards, a fiscal package was also announced by the government, in which customs and excise duties were slashed on petroleum products. The policy intervention (price band/duty cuts) helped in containing domestic product prices.

With increasing global oil prices, Mr Aiyar has already initiated the process of addressing the countrys energy security in the area of oil. A draft Strategic Petroleum Storage Bill is ready for setting up strategic crude oil reserves in the country.

At present, Indian refineries maintain about 15 days inventory of crude oil. For petroleum products, stocks range from 34 to 44 days.

The new Bill will make it mandatory for all refineries to maintain a compulsory inventory (quantum yet to be decided) and will also introduce a cess on refineries and importers of petroleum products to cover the interest and operating cost of building strategic crude oil storages with an initial stock of 5 million tonne of crude oil at a cost of $1.5 billion..

The International Energy Agency (IEA) has been seized of the need to create such strategic reserves. China too is thinking of creating such reserves. India has also taken up a case to be inducted into IEA, which at present has most of the developed nations under its fold.

It is proposed to initially create 5 mt of crude storage, which will give the country a 15-day cover. Later, it is proposed to increase the reserves to 15 mt. This, along with the mandatory requirement for all oil companies to maintain crude inventories, will raise the cover to around 60 days.

Mr Aiyar also initiated the debate on merging the oil PSUs to create two mega integrated entities. Top decision-makers in the sector along with chiefs of oil and gas companies sat face-to-face with Mr Aiyar to speak their minds on the issue.

While no specifics in this regard have been worked out as yet, one school of thought is to create two integrated oil companies operating throughout India.

This, it is proposed, can be done by: (a) merging Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) with ONGC. Gail (India) Ltd could be either strengthened/integrated or merged with this group. (b) Oil India Limited (OIL) to be merged with Indian Oil (IOC). Besides, in order to create an upstream balance for IOC, it is proposed ONGC should be asked to transfer its operations in Assam and Gujarat to IOC. However, no firm decision has been taken on this front so far.