The Kirit Parikh committee has recommended measures to deregulate the petroleum retailing sector. That would help public sector oil marketing companies like Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) as also private retailers such as Reliance Industries Ltd and Essar Oil.
However, the committee has not taken note of the plight of upstream companies like ONGC, Oil India Ltd and GAIL India that are reeling under the subsidy burden. It makes one wonder if energy security is no longer a policy goal for the government. For example, the committee has supported measures like determining under-recovery on domestic LPG and PDS kerosene based on the import parity principle that should help the OMCs as well as private refiners. It has also recommended mopping up a portion of the incremental revenue accruing to ONGC and OIL from their production in nomination blocks and providing cash subsidy from the central budget to meet the remaining gap.
Oil & gas exploration is supposed to be the backbone of every country?s energy security. India meets about 80% of its crude oil requirement through imports. And the country?s dependence on imported oil is expected to increase in the coming years as its economy is on a high growth trajectory.
In such a scenario, India?s energy security cannot be ensured if the country?s domestic production of oil & gas declines. Because of the government?s flawed policies, public sector oil companies are in bad shape. ONGC?s natural gas production has declined over the years because of the lack of investment by the company in ageing gas fields. The company is not able to recover even its cost of production by selling gas under the administered price mechanism (APM) to customers in sectors like power and fertiliser. So, it has little interest in investing in these ageing gas fields.
In contrast, private players make decent profits by selling gas at market-determined prices. Little wonder that RIL?which forayed into oil & gas exploration business only recently?has overtaken ONGC to become India?s largest gas producer.
ONGC is still India?s largest crude oil producer. But its production is stagnating. Meanwhile, private players are entering in a big way, giving the state-run giant a tough competition. For example, Cairn India?s Barmer block in Rajasthan alone would account for 20% of India?s overall crude production when it reaches its peak in 2011.
ONGC holds 30% participating interest in Cairn?s Rajasthan block. However, it would not benefit when production from the field increases. Rather, its losses will rise.
This is because ONGC is paying royalty on behalf of Cairn for the field. So, the company is losing on the field from the day one. While Cairn will have more resources to invest in its exploration programme, ONGC might have to slash its exploration budget.
ONGC and OIL together forked out as much as Rs 32,000 crore towards sharing OMCs? under-recoveries on petrol and diesel in the last financial year. This was about 34% of their turnover. Meanwhile, a back-of-the-envelope calculation shows the subsidy burden of ONGC and OIL could reach 51% of their turnover if international crude oil prices hit $100 a barrel.
On the other hand, the committee has recommended that the government maintain the current import parity-based pricing methodology for calculating the OMCs? under-recoveries on sale of household LPG and PDS kerosene. The committee has justified it on ground that India remains a net importer. It did not bother to go into how much LPG and kerosene OMCs produce in their own refineries or source domestically.
Import duties, freight, insurance and handling charges also get included when import parity pricing system is adopted for calculating the OMCs? under-recoveries on LPG and kerosene.
The committee has recommended import parity pricing not only for retail sale but also for refinery gate sales. So RIL and Essar, which make bulk supply of LPG and kerosene to the OMCs, also benefit from the pricing methodology.