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Winners and Losers of India’s Mutating Petroleum Policy

Manish Kumar (manish14jnu@gmail.com) is a doctoral scholar at the Jawaharlal Nehru University, Delhi.

In the last 25 years, the Indian petroleum sector has gone through several structural changes. Each stage of these reforms has favoured private sector companies, signifying a loosening of government control on the sector that had been asserted through investing in public sector oil companies in the 1970s.

The Government of India had an active role in the functioning of the country’s petroleum sector from the 1970s to the 1990s—both upstream and downstream. Subsequently, economic reforms made structural changes in favour of private and foreign companies mandatory, and the sector has seen a gradual withdrawal of the government from it.

This article examines who the winners and losers have been because of structural changes in the petroleum sector in the last 25 years. It briefly discusses its historical context, and goes on to provide a summary of the phases of deregulation that unfolded. A discussion follows, alongside a company-wise examination of the physical and financial performance of public sector oil-refining and marketing companies in the last five years.

It argues that with deregulation across different activities of the petroleum sector, public sector oil companies began shrinking. According to policymakers, deregulation was to improve the financial condition of public sector oil companies but the result has been the opposite. The note also holds that the government performed better as a regulatory body during the period it was more engaged in different activities of the petroleum sector through public sector oil companies.

At least until 1970, private oil companies dominated the petroleum sector. Between 1948 and 1961, these companies followed the value stock account (VSA) method for pricing petroleum products. Burmah Shell, the largest oil company, used to maintain the account, and other companies followed the same price. The government did not have much control over pricing, and it formed a committee under K R Damle (1961) to recommend a new approach. The committee recommended the import parity price (IPP) mechanism, and the government allowed oil companies to price petroleum products at rates not more than their import price. Later, the Talukdar Committee (1965) found that private oil companies were using the highest international price, though discounts for petroleum products were available in the international market.

Based on the findings of the Talukdar Committee, the government tried to implement different rates of discount for different products, but did not succeed when private companies threatened to decrease supply. Next, the Shantilal Shah Committee (1969) found that private companies were producing products in India, but charging import parity prices, which it believed was unjustified. Despite this, the government could do nothing until it realised that investment in the sector had to be increased. It did this in the existing public sector oil refining and marketing companies, and, through mergers and takeovers, the Hindustan Petroleum Corporation Limited (HPCL) came into being in 1974 and the Bharat Petroleum Corporation Limited (BPCL) in 1977. Meanwhile, in 1976, the Krishnaswamy Committee recommended the administered pricing mechanism (APM), a cost plus return pricing method. The implementation of the APM was possible only because public sector oil companies had a larger stake than private companies in the petroleum sector at that time (GOI 1961, 1964, 1969, 1976).

In the era of new economic policies, the petroleum sector also went through structural changes.

Phases of Deregulation

The central government formed an expert technical group in 1998 to formulate changes that could attract private and foreign investors to the petroleum sector. The expert group paved the way for dismantling the APM by 2002.

The story of deregulation can be divided into five phases. In the first phase (1998–2002), the APM was dismantled in upstream companies and all products were decontrolled, barring petrol, diesel, public distribution system (PDS) kerosene, domestic liquefied petroleum gas (LPG), and aviation fuel. The government decontrolled aviation fuel in April 2001. This transition was a shift to a market-determined pricing mechanism, although the import parity price method was still the guiding formula. The government allowed oil companies to sell petroleum products at market-determined prices after consulting the Ministry of Petroleum and Natural Gas. The first phase also marked the beginning of the New Exploration Licensing Policy (NELP), which allowed 100% foreign direct investment (FDI) in the exploration and production of crude oil and natural gas (Lok Sabha Secretariat 2005).

The second phase (2002–10) began in April 2002. Since then, there have been only two subsidised petroleum products; LPG and PDS kerosene. The prices of all other products had to be adjusted in agreement with the import parity price. Soon after this, rising world prices of petroleum products and crude oil compelled the government to step in again. This led to increasing under-recovery by oil companies, which was addressed by the burden-sharing mechanism (Lok Sabha Secretariat 2005).

Later, with the recommendations of the Rangarajan Committee (2006) and the Kirit Parikh Committee (2010), the price of petrol was deregulated. This can be seen as the beginning of the third phase (2010 to January 2013). The Kirit Parikh Committee recommended the immediate deregulation of petrol, and suggested the government also consider deregulating diesel. As this was politically sensitive, policymakers could work out a smooth passage for its implementation only later.

Thus began the fourth phase (January 2013–September 2014). In January 2013, the government allowed oil companies to increase the diesel price by 40–50 paise per month. It was a partial decontrol. The formula continued until September 2014, making up for the under-recovery on diesel. In the fifth phase (September 2014 to now), the prices of only two products are regulated by the government—PDS kerosene and LPG. In the case of domestic LPG, the government introduced the direct benefit transfer for LPG (DBTL) scheme in June 2013, which gives the subsidy directly to consumers.

Winners of Policy Changes

The deregulation of petroleum products involved giving three degrees of autonomy to oil companies. In the first instance, the government allowed them to decide the desired price, and in the second, granted them the autonomy to charge the desired price. Following the recommendations of the Rangarajan Committee in 2014, the first paved the way for the second through an exaggeration of the crisis. A careful examination of the debate shows that mounting under-recovery was the main reason for the deregulation of petroleum prices. But, apart from actual costs, an increase in under-recovery could also have been because of taxes or duties and other unnecessary inclusions (Sethi 2010; Dasgupta and Chatterjee 2012).

The third and most important autonomy was policy benefits granted to private and foreign players, directly or indirectly. The first phase began in 1998, and the very next year, Reliance Industries Limited (RIL) entered the refining business with a capacity to process 11,673 thousand metric tonnes of crude oil in Jamnagar, Gujarat. This was then 14% of the total refining capacity in India. In the next year, RIL expanded its refining capacity to more than twice that of the first year and had 25% of the country’s total refining capacity. This expansion continued through the third phase. In 2006–07, encouraged by the third phase, another big private oil company, Essar Oil Limited (EOL), increased its capacity by almost four times. In 2008–09, RIL opened another unit in the Jamnagar special economic zone (SEZ), increasing its refining capacity to 35,623 thousand metric tonnes. In the last 15 years, these private companies have increased their share in crude oil processing from 14% to 40% (Figure 1).

Apart from the expansion of private companies in the refinery business, foreign and private players successfully moved into exploration and production activities. The entry of private players began in 1994–95 in the form of joint ventures. The initial capacity of a joint venture was to be 2,55,000 tonnes, of which all but 4,000 tonnes was to be produced offshore. The share of private/joint venture companies in 1994–95 was just 1%. The ONGC was the biggest player with around 90% of total domestic crude oil production. Oil India Limited (OIL) was the second largest company, with around 9% of the total production. In the next 20 years, from 1994–95 to 2014–15, OIL’s share remained around 9.5%. In the same time, ONGC’s share fell from 90% to 60%. In 2014–15, 32% of total domestic crude oil was produced by private/joint venture companies. This took place through increased offshore production by private/joint venture companies till 2009–10, after which they stepped up production onshore as well (Figures 2, 3, 4, p 28).

After the NELP, the Directorate General of Hydrocarbon (DGH) has been in charge of allocating exploration and production areas to companies on the basis of bidding. As of May 2015,1 43 of the 252 blocks were operated by foreign companies, 73 by Indian private companies, nine by state oil companies, and the remaining 127 by national oil companies. Private and foreign companies together accounted for 46% of the total blocks allocated by the DGH since 1993. Other than single-company operated blocks, there are some consortium-owned and company-operated blocks. Of the 231 consortium blocks, 32 were operated by foreign companies, 71 by Indian private companies, nine by state oil companies, and the remaining 119 by national oil companies. Among private companies, RIL was the biggest with 43 blocks, and Crain Energy (India) the biggest foreign company.

Private companies now have a presence in several activities of the oil sector. Despite having free entry and exit, the retail business was not very good for private and foreign companies until September 2014. Yet, between 2010–11 and 2014–15, the average annual growth rate of consumption of petroleum products in India was around 4%. The market share of petroleum products for the public and private sectors grew by 3% and 6% per annum respectively. Between 2013–14 and 2014–15, the growth rate of the private sector share of the retail market was 14%, while it was 2% for the public sector share (Figure 5). Clearly, public sector oil refining and marketing companies are lagging behind in capturing emerging markets.

The fifth phase of deregulation in late 2014 coincided with the start of the “Make in India” policy. This central government promises private and foreign business giants more relaxed norms so that they can come and invest in India easily. The oil and gas sector was among the top six priority industries and 25 sectors selected by the government for the “Make in India” campaign. The National Democratic Alliance (NDA) government provided big incentives to private and foreign companies in the Union Budget 2014–15. The government announced no tax on exploration and drilling costs, while zero basic custom duty is allowed on capital goods for export purposes under the export promotion policy.2

Conclusions

One of the main arguments by advocates of deregulation of the petroleum sector was that it would lead to an improvement of the financial health of public sector oil companies. But the evidence points to the opposite. In the different phases of deregulation, private companies have captured a significant amount of market share. With deregulation of upstream activities, private companies have also entered into exploration for oil and production. They have lately been doing well in the retail business. With this, the physical performance of public sector oil companies has either decreased or slowed down, which results in less healthy financial performances. Private sector oil companies now flourish in the petroleum sector because of policy-level encouragement by the government, which has simultaneously been retreating from the sector.

Even if the government wants to retain its regulatory role, it is doubtful if it can do better than it did between 1970 and 1990. Before 1970, private companies refused to implement policy guidelines and also threatened to cut supply. But, after 1990, all policy changes have favoured private companies, and this means they not only do not oppose them but also lobby to speed up deregulation. If the petroleum sector’s development continues on the same road, private companies could well be in a position to control the market again.

Notes

1 The information is not accessible now; the last data work was done by the author in May 2015, http://www.dghindia.org/EPCompanies.aspx.

2 “Financial Support—Fiscal Incentives” at http://www.makeinindia.com/sector/oil-and-gas.

References

Dasgupta, Dipankar and Tushar K Chatterjee (2012): “Petroleum Pricing Policy: A Viable Alternative,” Economic & Political Weekly, Vol 47, No 46.

GoI (1961): Report of the Oil Price Enquiry Committee (Damle Committee), Ministry of Steel, Mines and Fuel, Government of India, New Delhi.

— (1965): Report of the Working Group on Oil Prices (Talukdar Committee), Ministry of Petroleum and Chemicals, New Delhi.

— (1969): Report of the Oil Prices Committee (Shantilal Shah Committee), Ministry of Petroleum and Chemicals, New Delhi.

— (1976): Report of the Oil Prices Committee (Krishnaswamy Committee), Ministry of Petroleum and Chemicals, New Delhi.

Lok Sabha Secretariat (2005): Seventh Report, Standing Committee on Petroleum and Natural Gas (2004–05), Ministry of Petroleum and Natural Gas, New Delhi.

Sethi, S P (2010): “Analysing the Parikh Committee Report on Pricing of Petroleum Products,” Economic & Political Weekly, Vol 45, No 13.

Updated On : 17th Jul, 2017

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