Price deregulation of auto fuel to pave way for pvt retailers re-entry

Written by Sajan C Kumar | Chennai | Updated: Feb 9 2010, 04:57am hrs
The proposed price-deregulation of auto fuels in the just-released Kirit Parikh panel report on petroleum product pricing is likely to pave way for re-entry of private players into auto-fuel dispensing. Reliance Industries (RIL) and Essar Oil (EOL) that had closed retail operations due to lack of level-playing field are likely to benefit from the proposed de-regulation, say analysts. While EOL has already started to ramp up its entire retail outlet network, RIL has kickstarted the process of opening its retail outlets. Especially, RIL would be able to ramp up its retail operations at a much faster pace as it ramped up its share in the diesel segment to 14% in three to four years, says Angel Securities in its special report.

Giving an in-depth analysis of the report, Angel Securities said the recommendations of the committee are positive for OMCs, upstream segment and private retailers. At current levels of global gasoline and diesel prices, the proposals would result in hike of the petrol and diesel prices by around Rs 3.9/litre and Rs 3.2/litre, respectively. The move would lead to nil under-recoveries on auto fuels as the entire burden would shift to the consumers.

Deregulation of auto fuel prices means the upstream companies would not have to bear any subsidy burden and hence the crude oil price realisation would increase substantially from the current level said Sharekhan in its report. During the first nine months of the current financial year, the government-owned upstream companies bore 100% of under-recoveries on auto fuels and none on cooking fuels. The increase in the crude oil price realisation would definitely have a positive impact on the earnings of the government-owned upstream companies. We feel, the de-regulation of auto fuel would benefit only the government-owned upstream companies like the Oil and Natural Gas Commission (ONGC), Oil India Ltd (OIL) and Gas Authority of India Ltd (GAIL) as they bear the entire under-recoveries on auto fuels as per the current subsidy-sharing mechanism, says the report.

Angel Securites, however, said this was not the first attempt by the government to de-regulate petroleum product prices. In an attempt to phase out subsidy on petroleum products in April 2002, the government dismantled the administered pricing mechanism paving way for free pricing mechanism for petrol and diesel, while prices of kerosene and LPG were still kept under the regulators purview.

It may be noted that the Kirit Parikh committee recommendations are almost on similar lines of the Chaturvedi Committee Report submitted two years back. The key difference between the reports is the timeline for the implementation of proposals. While the Chaturvedi Committee had emphasised on phased removal of subsidy on the domestic LPG by reducing the number of subsidised refills, the Kirit panel does not mention any timeline for implementation of the reforms. adds Angels report.

Sharekhan report said de-regulation of auto fuel prices was very much possible and was a practical recommendation made by Kirit Parikh committee, taking into account the prices of the international crude. It has been estimated that the under-recoveries would be to the tune of Rs 2.3/litre and Rs 4.3 litre on diesel and petrol, respectively.