Oil ministry seeks Rs 13,500 cr for OMCs

Finance ministry contests figure.

The ministry of petroleum and natural gas has sought Rs 13,500-crore subsidy from the government to compensate the revenue loss incurred by the three oil marketing companies during the first quarter of this financial year. The ministry of finance, though, is not likely to grant the amount in the forthcoming first supplementary to the budget.

A senior finance ministry official said parliamentary approval would be sought only for Rs 14,000 crore subsidy that was due for payment to Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation Ltd for 2009-10.

“There will not be any provision for the current year in the supplementary, which will be presented in the monsoon session of Parliament, starting July 26. Subsidy for the current year would be given only after the sharing mechanism is decided. The two ministries have held several rounds of meetings but a final view will be taken by an empowered group of ministers,” said the official.

The Budget 2010-11 had provided only Rs 3,108 crore for petroleum subsidy for the current year but the ministry of finance would now need to make a provision of Rs 14,000 crore which the three companies have already accounted as accruals in their accounts for 2009-10.

The government has asked upstream oil and gas producing companies – ONGC, GAIL India and Oil India Ltd – to shell out Rs 6,500 crore as part of a subsidy-sharing mechanism for the April-June quarter. It will partially make up the revenue loss incurred by the marketing companies for selling auto and cooking fuels below international rates.

The underrecoveries have been calculated assuming an average crude oil price of $75 a barrel for the whole year. Speaking to Business Standard, petroleum secretary S Sundareshan said, “Underrecoveries came to Rs 20,000 crore, of which Rs 6,500 crore comes from the upstream companies. We have written to the ministry of finance to contribute the rest. Discussions will be held to arrive at the final figures.”

On what was the basis of the calculation of underrecoveries, the secretary said they were calculated on the trade parity formula devised by the Rangarajan committee.

Source: Business Standard

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Pricing oil for the market

It appears to have been a planned manoeuvre. Not having got adequate traction from the Rangarajan Committee report on the pricing and taxation of petroleum products and not wanting to lose the opportunity of pushing ahead with petroleum price decontrol under a government not dependent on Left support, UPA II set up an Expert Group chaired by former Planning Commission member Kirit Parikh.

The committee's clear mandate was to examine the pricing policy for four sensitive petroleum products (petrol, diesel, PDS kerosene and domestic LPG) and recommend a viable and sustainable pricing strategy for these products.

The composition of the committee suggested that it was expected to recommend wholesale liberalisation of the pricing of petroleum products.

The Expert Group did not disappoint, and delivered its recommendations in five months.

What is surprising is that the Government has decided to accept most of the committee's recommendations and hike the prices of petrol, diesel, kerosene and LPG, opt for price decontrol for petrol immediately and announce that a similar transition would follow for diesel in the not too distant future.

Surprising move

The move is especially surprising because persisting inflation is already a major cause for concern. The Wholesale Price Index (WPI) figures for May pointed to three worrying trends. First, for the fifth month running, the aggregate annual rate of inflation as reflected in the month-on-month increase in the WPI was near or well above double-digit levels.

The figures for May put inflation at 10.2 per cent over the year. Second, the current inflation is particularly sharp in the case of some essential commodities, as a result of which the prices of food articles as a group have risen by 16.5 per cent and of foodgrains by close to 10 per cent. Finally, there are clear signs that what was largely an inflation in food prices is now more generalised with fuel prices rising by 13 per cent and manufactured goods prices by 6-7 per cent.

The immediate and near-term impact of the oil price decisions would be an aggravation of these inflationary trends focused on essential commodities that currently burden the common man. Petroleum products are consumed in some measure by all. Given the fact that these products are universal intermediates, entering into the costs of production of a number of goods and services, the cascading effects of the price hike on the costs and prices of a range of commodities is likely to be significant.

With prices of essentials already on the rise, the move threatens a return to the days when inflation was a major economic problem faced by the country. It follows, therefore, that this is the worst time for hikes in and the decontrol of the prices of petroleum products.

Under-recoveries

The Government claims that this was unavoidable because of the “losses” being suffered by the oil marketing companies (OMCs). When the domestic prices of oil products are controlled but the price of imported oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute.

This leads to what are termed “under-recoveries”, which would affect the accounts of the OMCs (Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and IBP) that obtain their supplies of petrol and diesel from the refineries at prices that equal their import price inclusive of customs duty.

According to estimates, if retail prices had not been raised under-recoveries by the oil marketing companies would have exceeded Rs 70,000 crore in the current fiscal year. Since this is unsustainable, it is argued, the hike in prices and a shift out of a controlled pricing regime is unavoidable.

The Government's argument is by no means watertight. While under-recoveries are a reality, they do not turn oil refining and marketing firms into loss-making enterprises, because those firms deliver a range of products and services, the prices of all of which are not controlled.

If, for example, even if we consider the profit after taxes of the most important oil companies over the last ten years, they have remained positive in all years and quite substantially so in some (Chart 1).

Under-recoveries are notional losses that only lower book profits relative to some benchmark. Thus, there is little danger that the industry would be bankrupted even if prices were kept at their earlier levels.

There is, of course, the question of fairness. Since there are many players involved in the industry there is no reason why under-recoveries should affect only the books of the oil marketing companies.

Sharing the burden

As Charts 2 and 3 show, the returns on net worth earned by the oil marketing companies are far more volatile and vulnerable than that garnered by the upstream oil companies (ONGC, OIL and GAIL). The burden should be shared by the latter, which receive prices that more than compensate for costs; by the Central Government which garners revenues in the form of customs duties and excise duties (besides dividends from the oil majors); and by the State governments which benefit from sales taxes.


This requires, for example, the oil refineries to offer discounts when selling products to the OMCs and for the Government to reduce the taxes it levies on oil products in order to absorb part of the under-recovery.

The controversial question as to how the burden should be shared was analysed by a committee headed by C. Rangarajan. The committee spent much of its energies on the different stages through which imported and domestic crude is converted into petroleum products supplied to the consumer, and the cost escalation that arises as the raw material passes through these stages.


Through that analysis, it found that the upstream oil companies (or oil companies other than the oil marketing companies, such as ONGC, OIL and GAIL) had recorded profits to the tune of Rs 15,600 core in 2004-05 and Rs 14,600 crore in the first nine months of 2005-06. That the oil industry's contribution to the central exchequer in terms of duties, taxes, royalty, dividends, etc., rose from Rs 64,595 crore in 2002-03 to Rs 77,692 crore in 2004-05. That the petroleum sector alone contributed around two-fifths of the total net excise revenues of the Centre. That taking Delhi as an example, Central and State taxes amounted to 38 and 17 per cent respectively of the retail price of petrol and 23 and 11 per cent respectively of diesel. And that the incidence of taxes as a proportion of the retail price in India was higher than in the US, Canada, Pakistan, Nepal, Bangladesh and Sri Lanka, though they were lower than in many countries in Europe known for their higher average level of prices.


In sum, the numbers suggested that there was an adequate buffer to shield domestic consumers from the effects of increases in international prices, so long as segments that can afford to take a cut in petroleum-related revenues because they have alternative sources of resource mobilisation are willing to accept such a reduction.


Difficult to justify

Thus, if at all there is an argument for price deregulation it can only be that it is for some reason wrong to expect the oil companies and the Government to bear the burden of the irrational fluctuations in the global prices of oil. That argument too is difficult to justify.

When the industry was wholly in the public sector, the prices of oil products were treated as one set of instruments in the tax-cum-subsidy regime of the Government. Any losses suffered by the industry or any shortfall in funds required for investment as a result of price regulation were to be met from resources mobilised through progressive taxes rather than from regressive price increases. The Government should have adopted a similar approach in the current situation and focused on rules that can and have been devised.


It needs to be noted here that oil prices have not been held constant in recent history. Rather, as Chart 4 shows, alternative measures of the average annual increase in prices over the last two decades indicate that the increase has been much higher in the case of retail prices of petrol, for example, than in the wholesale price index for all commodities.
The common person has indeed borne some of the burden of volatile oil prices. What the Government is arguing now is that the burden of irrational shifts in the international prices of oil should largely be borne by the consumer, even if the burden sharing involved is extremely regressive.

In what seems an afterthought, the Government has declared in its recent pricing policy announcement that it reserves the right to intervene in the market to protect consumers if prices rise to levels too high or price movements are excessively volatile. Nobody can or has taken that right from the Government. It is the Government that is giving it up, and exposing the common person to the volatility in international prices that has no rational basis.


The question remains as to why the Government is choosing this policy direction. Ideological commitment may be playing a role. But, more importantly, the Government's move seems intended to favour the private companies that have been allowed to enter and expand in this sector.

Private companies will treat any shortfall in profits as a “loss” and demand price adjustments. The Government seems inclined to oblige.
 
Source: Hindu Business Line
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India's public finance, oil price are big issues'

Indian and global equity markets saw substantial outflows in the month of May due to concerns ranging from Europe to China. In an interview with Jitendra Kumar Gupta, Cameron Brandt, senior global markets analyst at EPFR Global, which provides fund flow and asset allocation data (for over $13 trillion) to financial institutions across the world, shares his views on the issues. Edited excerpts:

In last couple of weeks, we have seen FIIs (foreign institutional investors) pulling out from Indian markets. What is the trigger and how much more outflow is India likely to witness?

There are two main and well-chronicled reasons for the shift in sentiment. The first is the fear that China’s efforts to rebalance its economy and head off asset bubbles fall short of what is really needed, and is setting up a situation where more harsher measures would be needed. China is now a key trading partner for most of the region’s larger economies and an abrupt deceleration of its economic growth would have a ripple effect.

The second is the Greek debt crisis and its impact on that region spells trouble for Asian exporters, almost any way you cut it. While China-US trade tends to get headlines, a slightly bigger share of China’s total exports goes to the EU-27 — which also happens to be India’s largest trading partner — and weaker demand from this region will have a real impact.

How are foreign investors pursuing Indian markets vis-a-vis emerging markets, particularly China?

Overall, India is viewed as a defensive play, albeit one with an IT (information technology) angle. So, the likely response to the country’s strong GDP growth by foreign investors will be a reassessment of plays geared to the domestic demand.

According to you, where is the global investors’ money flowing now in terms of assets classes and markets?

Since mid-2009, the bulk of the fresh money coming into the major fund groups has flowed into the four major bond fund groups: US, global, high yield and emerging markets bond funds. Flows into high yield bond funds have, however, turned sharply negative in recent weeks. Year-to-date winners among the equity fund groups — albeit at modest levels — are Pacific, global, global emerging markets and EMEA equity funds.

Flows into emerging markets bond funds have picked up markedly since the beginning of December 2009 quarter, with funds investing in local currency debt faring particularly well.

How is the currency risk perceived now? 

The strong flows into local currency emerging markets bond funds, allied to a longer-term pattern whereby fund managers are rotating out of dollar-denominated assets, suggest the whole issue of currency risk is being re-evaluated and currencies of emerging markets with solid fundamentals are being viewed as less and less risky.

What are the key concerns that foreign investors have in their minds regarding the Indian market?

India’s public finances and the price of oil are probably the two biggest macroeconomic issues. The uncertainty created by the Greek crisis has reinforced a long-standing coolness among FIIs to markets with big current account deficits. India’s, if you add in the states, could well be running around 10 per cent of the GDP at the moment. Given that India imports some 80 per cent of the oil it uses, spikes in prices translate — via the trade balance and fuel subsidy system — into bigger deficits and producer-driven inflationary pressures.

Are global investors waiting for a bigger correction in the emerging markets, especially Indian equity?

We don’t think so. There is still a lot of liquidity out there chasing a finite number of good quality assets. As for India, again, no. Investors are very anxious to put the money they preserved from the 2008-09 recession by moving it into ultra low-yielding money market funds.

Despite good earnings and economic growth, countries like India are suffering due to the ills of the European economies and the US market...

While it is not entirely fair, India’s fiscal issues and the extremely slow unfolding of the anticipated reform story give those external issues a resonance. India is also linked by trade and remittance flows to those economies.

Source: Business Standard

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LPG expansion, a stimulus for oil marketers

The government's plan to make liquified petroleum gas (LPG) available to three-fourth of the country in the next five years is set to be a major economic stimulus for the allied industry--firms supplying cylinders and pressure regulators to the three national fuel retailers·HPCL, IOC and BPCL. The move is also expected to create more employment in filling plants and in transportation.

The proposed drive to make LPG use more widespread will also result in the cleaner fuel being available to three-fifths of the rural folks by 2015, petroleum ministry officials said. Now there are only 11 crore consumers for LPG across the country, which is set to rapidly expand, they said. In the last five years, consumption of subsidised LPG has grown by about 30%.

Equipment procurement for the massive supply expansion would be staggered over the next half a decade so that there is no supply constraints. Although the three retailers gave 60 lakh new connections last fiscal, over two lakh prospective customers had to wait due to a short-supply of cylinders.

The three state-owned retailers are now about to issue tenders for purchasing cylinders and pressure regulators for this fiscal. A petroleum ministry official told FE that Indian Oil Corporation would soon procure over a crore new LPG cylinders and about 70 lakh regulators for release this fiscal. Bharat Petroleum Corporation is now in the process of procuring 36 lakh cylinders and 31 lakh regulators. Hindustan Petroleum Corporation is also acquiring equipment by a similar measure.

Production of LPG cylinders and pressure regulators is a major allied industry that is present across states such as Madhya Pradesh, Rajasthan, Tamil Nadu, Andhra Pradesh, Haryana, Maharashtra, Punjab and Orissa. Industry sources said the segment has been witnessing double-digit growth.

The fuel retailers are also in the process of stepping up the number of LPG distributors across the country—9,500 now— by 15% to enhance their reach. Under the government's plan to make LPG available to the poor through a new scheme named after former Prime Minister Rajiv Gandhi, at least 35 lakh poor families would get connections this fiscal. To find enough equipment to facilitate fresh connections, the government has asked agencies that provide piped natural gas in cities to take an undertaking from consumers to surrender their existing LPG connections.

While the massive expansion drive of LPG retailers would lead to an increase in the government's subsidy for the product, it is expected to reduce the subsidy on kerosene, a large part of which (up to 35% of public distribution kerosene) is now diverted to adulterate the costlier diesel. The government intends to cut down the kerosene allocation to states by a fifth as rural electrification and LPG availability goes up. This would also help in the government's larger goal of reducing carbon emissions. And the proposed reforms in the oil sector such as targeting LPG subsidy to the poor through direct cash transfers could stabilise the use of LPG in cities, where rich consumers benefit mostly from the government subsidy....

Source: Financial Express

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Private fuel retailers to make positive margin on sales after deregulation

Essar Oil (EOL), Reliance Industries (RIL), Shell Petroleum and state-run Mangalore Refineries and Petrochemicals (MRPL) have, at present, one wish in common — making positive margins on the sale of auto fuel and to scale up their fuel retail outlets.

These companies are waiting for the government to take a final decision on deregulation of fuel prices, which would not only allow them to regain their market share in fuel retailing but also help them make a gross margin of Rs 1,000 per kilolitre.

At present, the gross margin on sale of every litre of auto fuel is zero. Post deregulation, it would be a rupee per litre. Net margin would be 40p on each litre sold.

Essar Oil, which has 1,341 outlets operational, is selling petrol and diesel at Rs 4 and Rs 2.50 a litre, respectively, in all states, except Gujarat and Karnataka. The company plans to scale up its retail outlets to 1,700 by March 2011. But, if the prices are deregulated, the company says it might be able to achieve the target by this December.

LEVEL FIELD

“We had recommended that there should be total freeing of petrol prices, while in diesel, we welcome total decontrol, in a phased manner. The outcome of Monday's meeting (of the empowered group of ministers) will decide the pace of our ramp-up. Private players are not in the market due to government's fuel pricing policy. A level playing field will help firm up their market presence,” said an Essar Oil official. It has two per cent market share in the retail fuel segment.

Analysts say the proposed price deregulation of auto fuels, if implemented, would be positive for RIL and EOL.

“Fuel price deregulation could lead to nil underrecoveries on auto fuels, as the entire burden would shift to the consumers. While deregulation of the petrol prices is a possibility, chances of deregulation of diesel prices are less, considering its impact on inflation and given that 15 per cent of the total diesel consumption is for agricultural purposes,” said a Mumbai-based analyst.

Sector analysts say RIL in particular, could ramp up its retail operations at a much faster pace. “RIL might take only a couple of quarters to regain its lost market share, as in the past, in a matter of less than four years, the company was able to ramp up its share in the diesel segment to 14 per cent,” said a Mumbai-based analyst who tracks RIL closely.

RIL, in its fourth quarter results, said it had over 650 retail outlets operational. It has 1,400-odd retail fuel stations across the country and today has less than one per cent of retail market share. Shell India, which has 40 of its total 80 retail outlets operational, might also look at re-opening the balance outlets.

PSU REFINER AS AVID 

On the other hand, standalone refiner MRPL, a subsidiary of state-controlled Oil and Natural Gas Corporation, is waiting to expand its presence in the petroleum retail business as soon as the government allows the linking of petrol and diesel sales to market prices.

MRPL has two retail outlets operating under the HiQ brand. It has an approval in place since 2006 from the Union government to set up 500 retail outlets. The government had asked it to put its plans on hold and was firm that it would not give any compensatory bonds (for retailing petro fuels below cost price) to MRPL, though it was a government company.

MRPL says in view of heavy underrecoveries, it has been treading cautiously on setting up retail outlets. Each new outlet would cost over Rs 2 crore. The company would follow the dealer-owned and operated pattern.

"On the advice of the ministry, we had put our retail plans on hold. But, with the government planning to free retail fuel prices from its control, we might review our retail plans," a senior executive from MRPL told Business Standard.

The Kirit Parikh committee on the subject, in its report, had recommended market-determined pricing for petrol and diesel and linking the price of domestic LPG and kerosene distributed through the Public Distribution System (ration shops) to the increase in per capita gross domestic product and agriculture GDP, respectively.

It had also suggested a partial increase of Rs 6 a litre on kerosene and Rs 100 on every LPG cylinder. It also proposed a 20 per cent reduction in kerosene allocations for the PDS.

“Anybody in the business would like to reach the end-user. Our plans to be in marketing remain. Much will depend on what the EGoM decides in the meeting,” said an MRPL official.

Source: Business Standard

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Market-linked petroleum pricing on EGoM agenda

Petroleum Minister Murli Deora has started the groundwork for a probable rejig in the petroleum pricing policy even before the meeting of the Empowered Group of Ministers (EGoM), scheduled for Monday. On Saturday evening, Deora met Prime Minister Manmohan Singh to brief him about the EGoM meet. Deora also met Finance Minister Pranab Mukherjee on Sunday.

With the underrecovery on petrol and diesel falling by more than 50 per cent during the current fortnight and the crucial municipal elections in West Bengal behind, the proposed reform in auto fuel pricing has become more possible politically. A crucial meeting of the EGoM on Monday will deliberate on the proposal of the committee headed by former Planning Commission member Kirit Parikh to align auto fuel rates to market price.

Underrecovery on petrol and diesel has fallen to Rs 2.79 and Rs 2.9 a litre, respectively, from Rs 6.63 and Rs 6.26 per litre a month ago. The report, which was submitted in February, suggested market-linked prices for petrol and diesel.

The European crisis has tamed crude oil prices. Compared to an average of price $84.13 a barrel in April and $76.11 in May, the Indian basket of crude oil has averaged $73.07 in June so far. According to latest figures, the price of the Indian basket has dipped nearly 16 per cent to $72.45 from $85.88 on April 27. At the same time, the product-wise underrecovery has also been coming down.

The report had also suggested a phased increase in kerosene and LPG prices based on the increase in per capita urban and rural incomes. It had also proposed a reduction in kerosene sold through ration cards by 20 per cent. The OMCs currently incur an underrecovery of Rs 17.50 a litre on kerosene and Rs 262 on every LPG cylinder. Though a decision on kerosene and LPG might still be politically tricky, it is likely that the government may align petrol prices to the international rates.

Currently, the oil marketing companies (OMCs) — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — purchase crude oil at internationally benchmarked prices but the sale price of products like petrol, diesel, kerosene and LPG are not maintained in line with the international prices.

The EGoM may also look at tinkering excise duty so that only part of the price increase gets passed on to consumers. The excise duty on petrol and diesel is Rs 14.78 and Rs 4.74 a litre, respectively much above the revenue loss. In Delhi, the excise duty accounts for 30.84 per cent of the final petrol price and 12.44 per cent of the diesel price.

Private and public fuel retailers have been pressing for market-linked prices of petrol and diesel. “This is the best time to take a decision. Even if prices are freed, the burden passed on to consumers will be less than Rs 3 on a litre of petrol or diesel. The industry can reduce prices if crude oil dips further,” said an official with a private fuel retailer.

The report also recommended an incremental rate of taxes on higher crude oil price realisation from the nomination blocks of ONGC and Oil India Ltd (OIL) to keep the government’s subsidy share in the range of Rs 19,780-23,340 crore at various levels of crude.

Under the burden-sharing mechanism for 2009-10, the public sector upstream oil companies — ONGC, OIL and GAIL — were supposed to fully compensate the loss on petrol and diesel, estimated at Rs 14,430 crore. The loss of Rs 31,620 crore on kerosene and LPG was supposed to be made good by the government. Of this, Rs 26,000 has been compensated to the OMCs in cash. This still left the OMCs with a revenue loss of Rs 5,620 crore.

At a crude oil price of $80 a barrel, the underrecovery for the current year is estimated at Rs 98,000 crore. However, no subsidy mechanism is in place for the current year.

Source: Business Standard

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Oil product sales up 3.8% in April

The sale of oil products in the country rose 3.8 per cent in April to 12.13 million tonne year-on-year.

To meet the increase in demand, the domestic refiners imported 6.6 per cent more of crude oil in April against the same month last year.

Crude oil purchase by domestic refineries stood at 11.7 mt or 2.87 million barrels a day in April, according to a provisional data.

The country's crude oil production in April was up 5.2 per cent at 2.87 mt or 7,01,480 barrels a day, a Petroleum Ministry data showed.

The domestic refiners (17 public sector refineries and 2 private refiners, data for Reliance SEZ refinery is not available) processed 5.3 per cent more of crude at 13.136 mt during the month under review.

The refiners utilised 102.9 per cent of their capacity.

While Indian Oil Corporation processed 1.6 per cent more of crude at 4.4 mt, Reliance Industries from its first refinery in Jamnagar processed 5.5 per cent more about 2.9 mt. Diesel sales, which accounts for almost a third of the total refined products consumption, saw an increase of 13.5 per cent in April, while petrol climbed 9.8 per cent. Exports of oil products fell by 49 per cent to 1.3 mt.

Increase in domestic crude oil output during April was mainly due to higher production from onshore fields including Cairn India's Rajasthan oil fields. Production from onshore fields in April was up 16.3 per cent. According to the data, production from ONGC's fields fell by 0.1 per cent.

The country's natural gas production rose by 54.2 per cent at 4.52 billion cubic metre.

Source: Hindu Business Line

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Diesel price spiral will hurt refiners this fiscal

The diesel price spiral is worrying oil refiners as it is already close to 45 per cent of the total fuel losses of Rs 1,10,000 crore projected for this fiscal.

Diesel's share alone stands at Rs 47,100 crore, followed by kerosene (Rs 25,300 crore), LPG (Rs 25,000 crore) and finally petrol at Rs 12,600 crore.

This was not the case through 2009-10 and even in the early weeks of this fiscal when LPG and kerosene were the bigger “concern zones” as they accounted for nearly two-thirds of fuel losses.

However, the balance has tilted dramatically of late as diesel has seen a surge in its global prices and, along with dearer crude, could make things tricky for the oil sector.

This is because, according to the current compensation formula, Oil and Natural Gas Corporation along with Oil India and Gail (India) will make good petrol and diesel losses. This was all right in 2009-10 when the figure was around Rs 15,000 crore for the whole year.

However, it is a different ballgame for this fiscal with losses on petrol and diesel already projected at Rs 60,000 crore.

“There is no way the upstream oil companies can make good these losses because they will then sink into the red,” an oil sector official told Business Line.

Price deregulation

The only other option, therefore, is price deregulation of petrol and diesel, something which the Centre is in favour of. IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are already losing nearly Rs 6.50/litre on the two auto fuels.

In the case of kerosene, it is close to Rs 20/litre while for LPG, it is around Rs 250/cylinder.

Fuel demand

“The bigger concern is diesel because we will be in big trouble if demand for the fuel increases,” the official said.

With a power crisis looming large across States, it is feared that more diesel will be required to fuel generator sets which will then burn a deeper hole in the oil companies' pockets.

Will the Centre still go ahead and press for market-determined pricing? Indications are that the Empowered Group of Ministers, entrusted with this task, would free petrol completely from price control and do this in phases for diesel since it has the potential to stoke inflation.

This may not help the oil companies from the viewpoint of checking losses but there is little that they can do.

“There was such severe political opposition to the last price hike that it is going to be even tougher for the Government to push for another round,” sources said.

Though the last couple of days have seen crude prices plummet to $75 a barrel, experts believe this is a temporary phase caused largely by the financial crisis in Europe and that it is only a matter of time before it gets back to the $85/bbl level.

Source: Hindu Business Line

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What Greece has to do with oil prices

We’re all enthralled by the Greek drama that is slowly unfolding before our eyes, fervently hoping that tragedy will be averted. Oddly, electoral politics in the German state of North-Rhine Westphalia is affecting Greece, providing evidence of our increasingly interconnected world. But there’s another big issue that is not getting as much media coverage at the moment, despite the possibility that it could prove to be just as important. The oil price is beginning to creep up again: data from the Energy Information Administration (EIA) shows that just in the past month, world crude prices have risen by around 6%, to $82. This is well off the zenith of $137 in July 2008, but still significantly higher than the nadir of $35 in January 2009. Is this trend in oil prices likely to continue? Are we likely to see significant increases in oil prices accompanying significant reductions in global output? Is there a chance of that worst of scenarios, namely, high unemployment accompanied by high inflation?

Around the time of the zenith in oil prices, there were significant concerns about the role of speculators in the rise of oil prices. The rise and rise of oil prices in the preceding five-year period was attributed by several commentators, including George Soros, to the fact that there were large increases in the amount of capital allocated by speculators to commodity futures. Others argued that this increase in speculative activity in the futures market had no direct bearing on the rise in spot prices. Rather, increases in the demand for oil from India and China (and other energy-hungry emerging markets) were responsible for the rise in commodity prices. Which view is correct? This is important if we are to predict the future direction of oil prices. Holding the demand for oil constant, if speculators’ desire for oil futures drives prices, then we should think hard about the magnitude of speculative capital that will be committed to oil futures. If not, we should probably just look at global ‘real’ demand for oil.

So which view is correct? Recent academic work suggests that Soros’s view might be right. When the amount of speculative capital committed to commodity futures increases, there are subsequent increases in futures and spot prices. This continues to be true even after controlling for other sources of information (such as increases in real economic activity) that should affect these prices. For example, research done at the New York Fed shows that when financial institutions have a greater appetite for risk, commodity futures and spot prices increase. Researchers at Princeton and Wharton have shown that when open interest in futures markets grows, future commodity returns are high. Concurrently, together with researchers at Columbia and NYU, I have discovered evidence that measures of commodity producers’ hedging demands predict commodity futures and spot prices. We believe this is because increased speculative activity creates the space for hedgers’ demands to be satisfied at a lower cost.

The reference to Greece at the beginning of this article was not accidental. Consider what would happen if Greece defaults. Financial institutions’ appetite for risk will inevitably fall, leading to reductions in the capital they invest in all risky assets, including commodities. Using the logic above, this means there will be decline in commodity prices. Of course, the reduction in growth would directly affect commodity prices; the point here is that the speculative channel reinforces and amplifies the impacts on these prices over and above any information about global growth. On the other hand, if Greece manages to stave off default, commodity prices will likely face less downward pressure. This is like a natural hedge, and is reassuring—the nightmarish scenario of low growth and high commodity prices (and hence inflation) seems unlikely by this logic. In order to get that nasty scenario, the risk appetites of global investment managers and hedge funds would have to move in the opposite direction to global economic growth rates. That is a hard story to tell.

There are, of course, other factors at work that could raise oil prices even if Greece defaults. Ominously, a damaged British Petroleum oil well in the Gulf of Mexico is currently leaking around 5,000 barrels of crude a day, according to the US Coast Guard’s most recent estimates. While this is a tiny reduction in the supply of crude oil (estimated world production is 80 million barrels a day), it presages the need for more stringent safety and environmental safeguards on oil production, especially deep-sea drilling of the sort envisioned in Brazil and the Bay of Bengal. These safeguards, if implemented (as they should be), will raise oil production costs. But as far as the speculative channel is concerned, there’s more than one reason to watch Greece.

Source: Financial Express

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Petroleum price fixation

Much has already been written about how competition and regulation of competition, or more correctly, regulation of anti-competitive behaviour, leads to increased allocative efficiencies and consumer welfare. Less, however, seems to have been written on whether the structures of regulation put in place secure these desirable ends. This is particularly true in case of India where independent regulation is of relatively recent origin and is still evolving. It is, therefore, of immense importance that the structures of regulation put in place in different sectors be put under both intellectual as well as public scrutiny to see whether they are truly independent and empowered to regulate anti-competitive behaviour. It will be worthwhile to take a close look at the state of regulation in the petroleum and natural gas (PNG) sector, which has been consistently in the news of late. 

The PNG sector consists of four sub-sectors: exploration and production of PNG, oil refining and marketing, natural gas transportation and marketing, and crude oil and petroleum products pipelines. Of these four, the first, referred to as upstream, is supposed to be regulated by the directorate general of hydrocarbons (DGH) while the remaining three downstream sectors fall under the domain of the Petroleum and Natural Gas Regulatory Board of India (PNGRB). 

The DGH was created by a government resolution in 1993 and was posited as the regulator of the upstream sector. Nothing could be farther from truth. It is neither independent nor a regulator. When the instrument of creation, an order of the ministry of petroleum and natural gas (MoPNG), derives its genesis from a mere resolution rather than a statute, then independence would remain an illusory concept. The DGH operates under direct and complete administrative control of the ministry. It functions with the assistance of an advisory council and members of the council and staff of the DGH are appointed on deputation/tenure basis by the ministry in consultation with the DGH. In terms of its mandate, the DGH is predominantly an advisory, rather than a regulatory body. 

As per the MoPNG order, the DGH has been mandated to regulate only one area -the preservation, upkeep and storage of data and samples pertaining to petroleum exploration, drilling, production of reservoirs, etc. - and to cause the preparation of data packages for acreages on offer to companies. In all other areas relating to various aspects of exploration and production, it is only supposed to advise the MoPNG. In reality, therefore, it is the ministry that regulates the upstream sector, with the DGH virtually functioning as an advisory wing of the ministry. 

Competition in the market place is strengthened when firms derive psychological comfort from the twin securities of clear policies (on pricing, sale etc) and independent regulation. Unfortunately, in the upstream sector, there is complete void on these two fronts. Amidst the claims and counter-claims of failure and success of the Nelp-VIII, the fact remains that the void referred to above will be considered by firms as a major deterrent both to placing of bids as well as to post-bid dispute resolutions. The RIL-RNRL and RILNTPC dispute is merely a manifestation of this void. 

The scenario in the downstream sector is vastly different from that in the upstream sector — at least in respect of the structure of regulation. But is the end result any different? Here we have a genuine regulator, owing its existence to a statute and not to a mere resolution. In 2006, the Petroleum and Natural Gas Regulatory Board Act, 2006, was passed and the PNGRB was notified on October 1, 2006. The PNGRB has been invested with tangible regulatory powers and the statutory nature of its genesis gives it its independence. But despite its powers and independence, it is the MoPNG that seems to call the shots in the regulatory space. Nothing illustrates this better than the strange situation in the fixation of prices of transportation fuels. 

Before March 28, 2002, the marketing and pricing of petroleum products including transportation fuels, namely, motor spirit (MS) and high-speed diesel (HSD), were controlled by the government under a mechanism known as administered price mechanism (APM). The APM was dismantled by a notification dated March 28, 2002, under Section 3 of the Essential Commodities Act, 1955. Then, in 2006, the PNGRB came into existence. As a result of these two events, the theoretical position obtaining since October 1, 2006, is that all entities are free to price their products and the PNGRB is to regulate anti-competitive behaviour like predatory pricing. However, strangely, the government (read: MoPNG) still fixes the prices of MS and HSD and the PNGRB appears to be either powerless or disinterested in doing anything about it. How can the government fix these prices now? What is the role of PNGRB? 

The above issues have been examined brilliantly in a landmark judgment, dated October 5, 2009, by the Appellate Tribunal for Electricity, in Appeal No. 50 of 2009. The judgment, either directly or indirectly, establishes the following positions: 

Sections 11(a), 12 and 25 of the PNGRB Act, 2006, together give a wide amplitude to its duties and powers to foster fair trade and fair competition among the entities. 

The dismantling of the APM by the notification dated March 28, 2002, was a policy decision that has not been reversed by another policy decision. The government, therefore, cannot fix prices under the garb of policy. 

Section 2(x) of the Act specifically provides that it is only the entities that can fix the price and not the government. 

The above power given to the entities to fix the price cannot be usurped by the government. 

If the prices are to be fixed by the government as a sovereign, then it has to be declared as a public policy after observing formalities as provided under the Constitution. 

The PNGRB has so far been a mute spectator and has hardly lived up to the expectations of the firms and the nation at large. And this brings into focus another important observation: that independence may be a necessary condition but is certainly not a sufficient condition for a regulator to be effective. 

Source: Economic Times

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Oil: A tale of two cartels

Last week the price of oil once again breached the 18-month barrier to touch $87, sparking fears of another oil price spike, widely anticipated since the Davos face off between Europe's oil majors and the Saudis early this year. 

The price spurt of oil followed the US energy department's decision to raise stock by an additional two million tonnes creating record stockpiles of 356.2 MT, a 7% rise in US inventory over the five-year average stocks. The build-up was due to International Energy Agency's consumption forecast of 86.6 million barrels, up by 1.8% from last year. The IEA's revised estimates was possibly due to a sharp 28% jump in imports of oil by China in January, a reaction to “peak oil” fears set off at Davos. 

Tony Hayward, group chief executive of British Petroleum, made heads turn at the World Economic Forum in Davos, forecasting a “supply challenge” for the energy industry, which would have to increase output to 100mbd — a new peak for oil from the current capacities of 83-84 mbd. He was strongly backed by Mr Peter Voser, CEO of Royal Dutch Shell, who added to the scare stating that the industry would have to find up to $27 trillion to fund the investment in oil over the next 20 years. 

Group Europe's claim was promptly refuted by Khalid al Falih, Saudi Aramco's chairman and chief executive. Dismissing claims of a shortage, the head of the largest oil producing corporation in the world said, that a third of his capacity was currently idle, and ready to add four mbd on demand. 

He hit out at the price volatility and “misleading” rhetoric, that the world was weaning itself off fossil fuels, saying this did not give producers confidence to keep investing in production. “We don't believe in peak oil” , he told reporters later, dismissive of Europe's stark concerns. 

Ever since the year 2000, oil prices have been volatile under the influence of two power groups, the producer's cartel the Opec and the trading cartel the ICE. The ICE cartel includes Europe's oil majors BP, Shell and Total and the big banks — Goldman Sachs, Morgan Stanley, Society General and Deutsche Bank. Though the Opec cartel still controls 55% of the world's production , and the ICE cartel less than 15%, the price volatility has been dictated by the trading cartel. 

This has been due to the strategic control of the supply chain feeding Europe and the online trading and swapping of future contracts of Brent Oil (North Sea) and WTI (Texas) largely controlled by this cartel and actively traded at the ICE Commodity Exchange in London. 

OECD stocks during the last 10 years have risen from 840 million barrels to 1,020 million barrels, due to this volatility, despite a 5% drop in consumption. Over 80 million barrels of oil are being hoarded in super tankers around the world today, as per Frontline which owns the largest tanker fleet worldwide. 

Morgan Stanley, the largest stockist of oil today, along with Goldman Sachs, BP, Shell and Total own pipelines, offshore storage and terminal stocking facilities in middle east, Africa, Europe, and the US that are used to soak up excess oil stocks and quickly dump back the same to create a market volatility. 

Termed famously as the London Loophole , by Senator Feinstein, each barrel of oil is reportedly swapped 20 to 30 times at the ICE Exchange through high-speed computers before hitting the retail trade at substantially higher prices. 

The numbers at ICE are mind-boggling as a result of this round trip swapping, with $7 trillion transacted in CDS contracts during the last quarter, as per their website. The Opec oil, having much larger physical volumes, but not active at the exchange, merely follows the Brent Oil price trends at the futures market, in a classic case of the ‘tail wagging the dog'. 

Europe's oil majors build speculative pressure on the commodity markets with the help of hedge funds, commodity speculators and banks. According to a recent Mackenzie report, Europe's falling oil output at North Sea has been one of the reasons of this intense speculative activity around Brent Oil. In the year 2009 only eight oil and gasfields in North Sea with a total of 140 million barrels were commissioned against 600 million barrels ‘new oil finds' for previous years. 

Group Europe's scare mongering on peak oil at Davos is possibly a part of a strategy to raise prices to compensate for the volume losses. China and the US stockpiling early, will ensure that their consumers are hit last, should prices move above the $100 mark. 

(The author is an international business consultant) 

(Ever since the year 2000, oil prices have been volatile under the influence of two power groups, the producer's cartel, the Opec and the trading cartel, the ICE Though the Opec cartel still controls 55% of the world's production, and the ICE cartel less than 15%, price volatility has been dictated by the trading cartel China and the US stockpiling early, will ensure that their consumers are hit last, should prices move above the $100 mark.)

Source: Economic Times

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Oil & gas hunt gets $10.3 bn from pvt funding, FDI

Oil and gas fields in India have attracted a princely $10.3 billion (about Rs 46,000 crore) private and FDI till January this year since the beginning of the New Exploration and Licensing Policy (Nelp) a decade ago.

Replying to a question in Lok Sabha, petroleum and natural gas minister Murli Deora said natural gas production in India has increased 75% compared to 2008-09 and is expected to double in the near future.

The minister also said under Nelp, about 46% India’s sedimentary basin area has been awarded for exploration including deepwater exploration.

So far, 77 oil and gas discoveries have been made, including major gas discoveries in deepwater. Out of these, 49 discoveries were made by private/foreign companies.

Commercial oil or gas production has commenced from 6 discoveries till date. Crude oil production is about 20,000 barrels per day, which is likely to increase to 34,000 barrels per day in near future, an official statement said quoting the minister.

Replying to supplementary questions, minister of state for petroleum and natural gas Jitin Prasada hailed the participation of as many as 36 companies including domestic private firms, MNCs and state-owned companies in the eighth round of auction of fields under Nelp.

Source: Financial Express

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India to have strategic oil reserve by Oct 2011

India will complete building its first strategic crude oil storage by October 2011 in an effort to insulate itself from supply disruptions.

India, which is 75 per cent import dependent to meet its crude oil needs, is building under-ground storages at Visakhapatnam in Andhra Pradesh and Mangalore and Padur in Karnataka to store about 5.33 million tonne of crude oil.

This is enough to meet nation's oil requirement of 13-14 days. "The storage at Visakhapatnam will be mechanically completed by October 2011," said Rajan K Pillai, Chief Executive Officer of India Strategic Petroleum Reserves - the state-owned firm building the strategic stockpile.

Visakhapatnam will have capacity to store 1.33 million tonne of crude oil in underground rock caverns. "Huge underground cavities, almost ten storey tall and approximately 3.3 km long are to be built (in Visakhapatnam)," he said.

A similar facility in Mangalore will have a capacity of 1.55 million tonne and would be mechanically completed by November 2012. A 2.5 million tonne storage at Padur, near Mangalore, would be completed by December 2012.

India will join nations like the US, Japan and China who have strategic reserves. These nations use the stockpiles not only as insurance against supply disruptions, but also to buy and store oil when prices are low and release them to refiners when there is a spike in global rates.

However, the storage India is building is very small compared to the 90-day strategic stockpile in the US. The Indian govt was considering to raise the storage capacity to 15 million tonne to cover for 45 days requirement but no decision has been taken as yet.

The over 5 million tons strategic storage facility, Pillai said, was being built at an estimated cost of Rs 2,397 crore (at 2005 prices). "There is likely to be a price escalation because these cost estimates are based on 2005 prices. We think the cost may cross Rs 3,000 crore," he said.

ISPRL is a wholly-owned subsidiary of Oil Industry Development Board (OIDB) - a government body that lends money to energy projects. Pillai said the cost of building the strategic stockpile is being provided by OIDB as equity to ISPRL.

"The three storages will be able to meet nation's oil requirement of 13-14 days (in case of emergency)," he said. The cost estimate does not include the cost of purchasing 5.3 million tons of crude oil.

"The crude procurement and how it will be managed will be the responsibility of the government. Our job is to build the storage," he said.

Like the US, the government may buy crude oil when rates are low for stockpiling. It may release it to refiners during times of spike in global crude rates like those witnessed in July 2008, when prices touched an all-time high of $147.

Source: Business standard

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Oil price warning

The current trend in crude oil prices gives cause for much concern and if this persists, many of the calculations indicating further recovery and improved growth for the economy can be nullified. This year, oil prices have risen from $70 per barrel to briefly touch $87, falling back somewhat thereafter. Such levels have not been seen since October 2008. That year, oil crossed a historic $140 per barrel, falling sharply thereafter to under $40 as recession gripped the global economy. It is the continued upward trend through the latter part of last year, which shows no sign of abating even after crossing $80, that has the tea leaf readers worried. Globally, the rising price underlines the fact that recovery is gaining ground, but if the price continues to rise, it can stall the recovery, which is not yet fully established, in mature economies. Some analysts have even gone on to say that high energy prices have the potential to trigger a recession. Should this happen in the mature economies, the fallout in the emerging economies can only be adverse and can stymie their more buoyant growth.

High oil prices, which rein in growth, will be bad news for India in more than one way. Slower growth will take away some of the buoyancy that revenue collection is now displaying. But India’s problem is compounded by the fact that oil prices are not fully passed on and thus result in under-recoveries for the oil marketing companies. Last year, under-recoveries nudged Rs 50,000 crore, with the government chipping in Rs 12,000 crore. According to a senior oil ministry official, if oil prices again touch $87 and refuse to come down then, with current consumer prices, the current financial year can end up with a massive under-recovery of Rs 80,000 crore. And should prices reach $100 per barrel, the under-recovery will touch Rs 1.2 lakh crore. Under-recoveries, if nothing else, ruin the finances of the oil marketing companies, and sap their energy and desire to run themselves efficiently.

All this points to what is simple and widely understood. For India to be on a sustainable growth path, its energy prices will have to be market-determined and go up if global prices go up. There is a double negative to under-pricing of energy. First, it ends up as higher public sector deficit, hidden or open. Plus, the lower prices send the wrong signal, offering no incentive to becoming more energy-efficient. This undermines what is the best insurance in a world that will have to live under the shadow of high energy prices — becoming more energy-efficient and thus not having growth and prosperity held hostage to the energy shortage plaguing the global economy. The imperative before the government is thus clearly laid out. With oil at over $80, a rise in consumer prices is overdue. This will make an already worrisome inflation scenario worse, but with better-to-full recovery taking place, inflationary expectations will go down, thus bringing down prices in general over time. Since an election is not round the corner, the government should not hesitate to act in the right direction.

Source: Business Standard

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