The ministry of petroleum and natural gas has been fire-fighting on one issue or the other round the year. When it wasn’t the volatility of oil prices that grabbed media attention in 2009, it was turmoil of another kind that pulled the ministry into one of the most bitterly fought corporate battles. Petroleum Secretary R S Pandey speaks to Ajay Modi and Jyoti Mukul on the “unprecedented year” and his views on market pricing and the Ambani war. Edited excerpts:
You were at the helm of policy making when the ministry witnessed the historic fluctuations (in oil prices). Was the government response has been appropriate?
Many countries’ economies were hit hard, because of high prices and by falling prices, depending on whether they were an importing or producing country. In India, a kind of balance was struck by the government to protect the interest of consumers, the oil marketing companies and the economy. The formula for charging excise duty was touched up. Some way was found to transfer funds from upstream to downstream companies. To some extent, the burden was placed also on the oil marketing companies and yet they did not go into the red. The consumers were burdened as little as possible. Unpredictability and swing of this kind placed an unanticipated burden on this sector. In retrospect, one feels the situation was managed well. A practical way was found, although it was done in an ad-hoc manner, in the absence of a long-term formula.
What are your views on market-determined pricing?
If the sector gets totally deregulated and there is volatility, prices will go up and down frequently. Deregulation will be good for the companies. But, to what extent consumers’ interest will be impacted would remain to be seen. Every problem has a solution and solutions can give rise to problems.
You were at the helm of policy making when the ministry witnessed the historic fluctuations (in oil prices). Was the government response has been appropriate?
Many countries’ economies were hit hard, because of high prices and by falling prices, depending on whether they were an importing or producing country. In India, a kind of balance was struck by the government to protect the interest of consumers, the oil marketing companies and the economy. The formula for charging excise duty was touched up. Some way was found to transfer funds from upstream to downstream companies. To some extent, the burden was placed also on the oil marketing companies and yet they did not go into the red. The consumers were burdened as little as possible. Unpredictability and swing of this kind placed an unanticipated burden on this sector. In retrospect, one feels the situation was managed well. A practical way was found, although it was done in an ad-hoc manner, in the absence of a long-term formula.
What are your views on market-determined pricing?
If the sector gets totally deregulated and there is volatility, prices will go up and down frequently. Deregulation will be good for the companies. But, to what extent consumers’ interest will be impacted would remain to be seen. Every problem has a solution and solutions can give rise to problems.
Many committees have already been set up to go into the issue. Is there political will to accept the recommendations, especially since we now have another committee on oil prices, under Kirit Parikh?
I have a feeling that this time the Parikh committee’s recommendation would be the basis of decisions to be taken by the government. There is a seriousness to find a way in a structured manner. We will have to wait for the report to know the future path.
The political will would certainly be to try to protect the interest of consumers. But, if a formula can be devised wherein the interest of all stakeholders are taken care of, it should be accepted. One should also remember that a major portion of the price build-up is because of the high incidence of taxes. State tax is still on an ad valorem basis, though the central government decided to change the excise duty to a specific rate. The lower the taxes, the lower would be the cost. The lower the cost of crude, the lower the cost of the product, but crude prices are so volatile: if states do not reduce taxes, the prices would remain high. The petroleum sector touches every household. The poorest of the poor depend on kerosene. The richest of the rich depend on jet fuel. Balancing all these is a challenge.
Do you agree with the view that low prices lead to inefficiency in usage?
To some extent, it is true. But, the demand for transportation fuels, i.e. petrol and diesel, is highly inelastic unless the prices become too high. It is correct to say that demand and price are linked but there is another theory in economics called elasticity of demand. We will still use our cars even if the price of petrol goes up. Bus transportation does not come to a stop if diesel prices go up. Forty per cent of petroleum products are used in transportation and the demand for transportation is highly inelastic.
In the case of cooking fuels, it depends on alternatives. In rural areas, people will switch back to firewood if LPG is priced too high. Another alternative is electricity. Consumers will choose whichever is cheap. Demand management has to be done, not necessarily through pricing but through improvement in technology and other means to promote conservation. Transportation systems in Japan or USA are much more efficient than in India. In the Gulf countries, the efficiency level is even lower.
We tried promoting efficiency through an experimental four-week campaign by PCRA last year, which has been an eye-opener. The findings point out that savings of Rs 7,000-10,000 crore is possible annually. Efficiency needs to be ensured through a mix of technological innovations, administrative and fiscal measures and, to some extent, pricing.
Perhaps natural gas does not touch people as directly as petroleum products but its prices are controlled by the government, whether produced from nominated fields or from those bid out to the private sector. Shouldn’t gas prices be decontrolled?
There is a misunderstanding. Only the price of APM gas (produced from nominated fields) is controlled, because this gas comes from fields given to government companies on a nomination basis. So, the government took a view that it should be on a cost-plus formula. In gas produced from NELP (ones that have been bid out) fields, it is not cost-plus. Under the contract, the government has the power to approve the price but it cannot approve any price it likes. The basis is ‘arm’s length’ pricing. Another name for it is market price.
The government approving the price is because the gas market is not fully developed in India and, in fact, the whole world. Crude price is the same in the world, depending on quality. But, the price of gas in the US is very different from that in Japan. The gas market is non-transparent, internationally. I am told if you put an advertisement for buying LNG, nobody will quote a price. There are only a few producers, who do not normally quote prices. These are settled through negotiations. Yet you know the price levels at various places. In India, there are four or five prices. We have talked of price formula in the PSC (production sharing contract) because gas price is linked to (that of) crude. So, we have to see what precise linkage is being provided. We have to ensure that it is not a suppressed price or an exploitative price.
For instance, the KG (Krishna-Godavari) Basin gas price is linked to crude oil. But, it is at a fixed price right now because for the last three years there has been volatility in crude prices, which went up to $147 and then went down, and the KG formula has a cap of $60. I think there is lack of education and appreciation of the PSC outside. There is a requirement for approval of the price formula but it cannot be an ad hoc approval.
Gas prices have been at the heart of the Ambani corporate war, in which the government has also been dragged in. Since you are approaching the end of your tenure, how do you look back? Was there any way of avoiding government institutions being maligned?
The two industrial houses have a place of pride in the country and have significant presence in the national economy. A dispute between them has been a matter of concern but the kind of attack and campaign the ministry saw was unprecedented. The case is sub judice, so I can’t say much. But, to answer your question, the contractor cannot enter into any contractual understanding with anybody against the PSC provisions, wherein the government has the right to regulate usage. Once the government’s right got infringed by way of a judgement, it had to go to a superior court for redressal. The private arrangement envisaged utilisation of gas from all present and future fields of Reliance Industries.
Normally, government would have nothing to do with a private dispute between two companies but here was a case where two companies had sought to utilise a national resource among themselves, without regard to the PSC and the constitutional provisions. The adverse impact of the judgement on government policies and rights and the user industries had left government no alternative. If it had been avoided, one would have been happier. It took lot of our time, created ripples, caused accusations and counter-accusations. Misinformation against the ministry had been carried out. In retrospect, I feel the government’s position has been vindicated.
There was another side to this issue which got ignored because of the controversy. India’s gas production overtook its crude oil production, but can increased production lead to higher gas demand and lower petroleum consumption?
We have to increasingly move towards a gas-based economy, as it is cheaper and cleaner than other petroleum products. Keeping in view the climate change challenges and also global availability, gas should substitute crude to the extent possible. Gas consumption is not only based on availability but also its transportation. The gas pipeline density in India is among the lowest in the world. In keeping with the growth in our economy, we have to speedily expand the pipeline network. There is a need to ensure that all demand centres are connected by pipeline for use in industry and household. There is a demand for gas but it is latent. The demand will manifest only if the pipeline is there.
Source: http://www.business-standard.com/india/news/%5Cin-oil-sector-solutions-can-give-rise-to-other-problems%5C/382651/
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