Oil Reforms Shelved For Now?

Petroleum ministry officials were relieved when it was recently announced that the finance ministry's expenditure department would share its subsidy burden with an additional grant of Rs 14,000 crore.

This grant was to make up for most of the losses incurred by the oil marketing companies — IOC, HPCL and BP — in the fiscal 2009-10. But their happiness may be shortlived as now a message is coming out of government quarters that the recommendations of the Kirit Parekh Committee on oil pricing might be put on the back-burner.

It is expected that with the surge in international oil prices, debt could double in the next fiscal compared to what it is now. The projected revenue losses could go up to Rs 90,150 crore at the end of fiscal 2010-2011 against Rs 46,051 crore at present. It seems there is no political consensus even among government constituents to push for deregulation of the petroleum sector.

Now with this grant, the pressure of fiscal debt on the Oil Marketing Companies is fizzling out, and there is no immediate political pressure on the government to deregularise the petroleum sector.``Now since the losses are done away with, neither the government nor the OMCs are under any pressure. Now they can delay this decision for the next one year, and the Kirit Parekh’s effort might see the same fate as that of his predecessors, who gave similar recommendations,’’ added an official.

The decision to release the grant came after petroleum secretary S Sundereshan’s meeting with expenditure secretary Sushma Nath. The timing of the meeting, before the EGoM which is scheduled to meet next week, is interesting. The EGoM, set up to look into the Parekh Committee's recommendations, is chaired by Finance Minister Pranab Mukherjee and has Minister of Agriculture, Sharad Pawar, Railway Minister Mamta Banerjee, and Fertilizer Minister, Azagiri as other members.

Politics Of Price Rise
Petroleum ministry officials are afraid that after this burden sharing exercise, the whole deregulation process will be shelved for the time being as it will involve the politically sensitive issue of price rise. As per sources, the Congress, especially, Prime Minister Manmohan Singh, is keen to deregulate the petroleum sector. For this, Congress floor managers are trying to rope in new friend BSP and breaking ice with parties like AIADMK as well as BJD. It does not expect much support from allies including Mamta Banerji’s Trinamul Congress, which has 19 members in the Lok Sabha, and DMK which has 18 members.

THE LOSSES DOWNSTREAM COMPANIES MAKE ON PRESENT DAY BILLS

Total revenue loss: Rs 272.5 Crore per day

Projected losses this year: Rs 90,150 cr at end of fiscal 2010-2011

The losses per litre of petrol: Rs 6.63

Diesel per litre losses: Rs 6.25

LPG per cylinder losses: Rs 254.37

Kerosene losses per litre (sold under PDS): Rs 19.74

Early next year, at least six states including West Bengal and Tamil Nadu would go to the polls. Neither TMC's Mamta Banerjee, seeking to snatch West Bengal bastion from communists, nor DMK, which would seek re-election in Tamil Nadu, would want to be seen supporting a policy leading to price rise.

Further, political observers believe that Sharad Pawar, who has recently earned bad publicity as the `man behind’ inflation as well as for IPL controversies, is unlikely to push for an `unpopular’ decision.

The government in both the legs of the budget session was under fire from the Opposition, especially on the issues of involvement of their ministers in controversies relating to IPL and 2G spectrum allocations and inflation.

It could be added here that the finance ministry has already released a budgetary support of Rs 12,000 crore in cash subsidy. The government is expecting over Rs 45,000 crore in the ongoing 3G telecom spectrum bidding process and the money has been promised out of this. However, the officials added that since the finance bill is passed, these would be made part of the additional demands, and would be given to the OMCs later in the financial year.

In his interaction with media, Petroleum Minister Murli Deora said: ``We had sought Rs 19,620 crore in compensation but they (the finance ministry) shared this amount with us.’’ The officials as well as the top brass of the oil marketing companies have been sweating for the last four months, especially after witnessing the surge in oil demand in the international market, and the northward trend in the oil prices in the last six months.

In fact, in his reply to an unstarred question in the Rajya Sabha, Minister of State for Petroleum, Jitin Prasada, informed the Upper House that OMCs have incurred under-recoveries of Rs 46,051 crore in 2009-10. The ministry was pushing for the increase in the petrol prices, and implementation of the Kirit Parekh report for deregulation of the sector. However, the analysts added that this would give additional cash flow to these OMCs, and would enhance their strength to raise debt. ``This would give them additional fuel to survive at least till the end of the present fiscal, with the situation not seeming to improve.’’

Echoing the same sentiment, the secretary has said the oil price at $80-81 is too high. Prices at $60-70 is comfortable; beyond $75, the situation becomes unmanageable. Thanks to the situation in Europe and Greece in particular, oil is selling at lower price now. Otherwise it had already hit the roof top of $90 per barrel, and as per various analysis agencies, it would cross $100- mark in times to come which would increase the import burden of the national exchequer.

Road-Block For FPO?
Officials further added that this could also cause IOC's FPO plan to hit a road block. ``Unless you ensure the investor that he would be surely getting returns, there is no possibility for the success of either an IPO or an FPO,’’ said an official. However, sources added that they are considering disinvestment in other two OMCs as well, but this depends on the outcome of the EGoM meeting.

However, the sources added that the upstream companies would be called in to share the remaining Rs 5,620 crore, it could be added that these upstream companies such as ONGC, GAIL and Oil India have contributed Rs 8,364 crore by way of discount on crude in the first three quarters.