'We are not here to do free business'
New Delhi   22-Jun-2008
Mr Behuria is one of the most visible faces of corporate India, particularly now with crude oil scaling new heights. In the last couple of years, Mr Behuria has been battling on many fronts with the government’s continuous postponement of a price hike in fuel products. The marginal price hike earlier this month, does not really help IOC as Mr Behuria will explain. <b>Sarthak Behuria:</b> I just want to give you little background because everybody thinks that pricing is the only issue for oil companies. The oil industry was nationalised in the 1980s when the government felt a need to protect it, develop it, and to encourage investment in it. The industry was compensated under the fixed price regime and a fixed return regime. All decisions — the production of crude oil, refinery processing or expansion, expenditure on investment, purchase of crude oil, etc — everything was regulated through a mechanism called the oil coordination committee. It had 20 pool accounts whether it related to crude oil price equalisation or refinery compensation. All the credits that companies made went into that pool account and all were paid a fixed rate of return on investment. Everybody was very happy because they got 16% assured return. This continued till about 2002 when the private sector entered the industry, in particular Reliance. From the historical perspective, Reliance would have been compensated on a cost-plus basis. But the government decided it was time to deregulate the industry, not only because of Reliance but also because the government felt the oil industry must compete in the globalised world. First, they deregulated the lubricants’ market then they deregulated refinery investment. Thereafter, they brought in parallel marketing for kerosene oil. Now anybody can import kerosene oil and market it. In April 2002, the government decided that everything would be based on free market principles. The upstream companies would get import parity prices and sold products to marketing companies on import parity rates. This included freight, shipping charges, custom duty and excise duty as if these products are imported from other countries. The prices would be revised every fortnight, particularly in the case of petrol and diesel. The prices of all other products would be revised every month. On April 1, 2002, the prices of all products were fixed at certain rates. The government made one exception, that was on kerosene oil and LPG. They said that... these are public distribution products for the poor, so we will continue a subsidy regime on kerosene oil and LPG. The government would commit itself to about Rs 75 a cylinder. That means if our refinery gets a price of $400 per tonne of LPG then we would add our margin and deduct it by Rs 75. A similar principle is followed in the case of kerosene with a Rs 2 per litre subsidy. In 2005, the oil marketing companies were to be allowed to sell a market driven price. Unfortunately, in run up to Iraq war, the prices of kerosene, diesel, LPG, petrol and other products went up much more than we expected, particularly during 2004-05. So, while we had official approval to increase the price of LPG, petrol, diesel and kerosene, the government did not allow us to change the price of LPG and kerosene. From 2005 onwards, the government stepped in to have informal control over pricing of petrol, diesel, kerosene and LPG. Till about a year ago, the average crude oil price was $70-75 per barrel. Then it went to $100. Today, the price of petrol and diesel is about $150-160 per barrel. We are losing around Rs 500 crore per day on the sale of petrol, diesel, kerosene and LPG. The sale of these four products constitutes about 65% of our sales. Last month, the situation came to a head when our borrowing went up from Rs 35,000 crore to Rs 41,000 crore. Last year, the oil industry lost about Rs 77,000 crore on the sale of these four products. Since upstream companies were reaping the benefits, they shared one-third of the loss. The government said, one-third would be shared by customers, but that did not materialise. The remaining one-third was to be shared by oil marketing companies. The government decided to give us Oil Bonds to compensate us. We said to the government — the bonds are just a piece of paper. They also realised that we would not be able to invest, if we don’t make profits. Last year, the government gave us Rs 35,000 crore worth of bonds for our Rs 77,000 crores under-recoveries. We received about Rs 26,000 crore, or one-third of under-recoveries from upstream companies. Finally, we ended up losing about Rs 10,000 crore with a profit close to Rs 7,500 crore. During the past six weeks, crude touched $130-140.... At this rate, the under-recoveries would touch Rs 2,30,000 crore this year. In such a situation, even the upstream companies would be unable to share the burden of loss. Their total turnover is Rs 70,000 crore, how can they pay Rs 80,000 crores? Our borrowings are going up to Rs 41,000 crore. There will be a situation when we won’t have money. Also, due to availability of cheap fuel, there is a huge distortion of demand. The growth in demand of fuel is 20% where all our projections say it should be 5%. And, there is no public consciousness that India is a petroleum products importing nation. LPG is being used for heating bath water in winters. Also, there are unintended distortions in the subsidised regime the irony is that when the prices go up, the demand should come down. But because of the artificial subsidy, the demand is going up and the prices are going up again. <b>Smita Agarwal: A Union minister recently remarked before the price hike was announced that given the balance sheet of OMCs, they have enough room to survive for the next five years. Please comment. </b> <b>SB:</b> Indian Oil has a profit of Rs 7,500 crore. That is the amount available to me. But every year, I have to make certain investments ranging from Rs 10,000 crore to Rs 12,000 crore-a-year. If I don’t make money, how can I invest further? I need to make money to invest, otherwise there will be no pipelines or new refineries. It’s said the government has forex reserves of $300 billion — we could buy crude with that money. But where is the money? Eventfully, my profits must meet my growing needs. I should be a debt-free company, today. The world over, oil companies are debt-free companies, Why not in India? Today, I don’t know from where I will get the next month’s investment. There are too many uncertainties — how much of a price hike would be allowed, how many bonds I would get, etc. <b>Zeenat Nazir: There is a sense that the mechanism for calculating base price of fuel, based on international import parity prices is distorted and there is no transparency in this mechanism. Why is this so? </b> <b>SB:</b> There is formula to calculate the price of fuel. It is opportunity cost, basically. Whatever is the cost of importing ATF into Mumbai, is the price that I can charge... in my Mumbai refinery, otherwise nobody is going to buy from me. There are storage and handling charges and margins which may be about 5%. For some airlines we have reduced the margins to 1-2%. The real distortion is due to excise, sales tax and freight. <b>Zeenat Nazir: Recently, the Civil Aviation minister Praful Patel said that he would ask OMCs to reduce the base price of ATF? Is it possible? </b> <b>SB:</b> We have been losing considerably on 65% of our sales. We can’t afford to lose on the other 35%. We are not here to do free business. How can aviation be subsided? If petrol is subsidised, it is bad enough — let the people pay what it costs. The government is not going to reduce their duties. ATF is $160 per barrel today. It is bad that we are selling it as kerosene at Rs 9 per litre. <b>Coomi Kapoor: In the light of these huge subsides, how would you make profits? How are you going to inspire confidence in your investors when you are suffering losses on sale of petroleum products? </b> <b>SB:</b>The profits are reportedly quarterly. There are four-five components of profits that are reported in Profit and Loss A/c of oil companies. One major component is gross refinery margin. Another big factor is under-recoveries which are very high. Sometimes, we get six months bonds. It is very difficult to announce a profit every quarter. We, as a company, should be able to project our Profit and Loss Account for the next five years. We should be able to see whether we can take up long-term projects. As far investors’ confidence is concerned, there has been a huge discontent. First, because we are PSU. The other is that there is uncertainty about prices. <b>P Vaidyanathan Iyer:You were BPCL chief when the NDA government was in power. Now under the UPA rule at the Centre, you are heading a much bigger company. How different are the policies of the two governments? </b> <b>SB:</b> The oil industry is not affected by a change of governments. The circumstances which we have seen in the last three years have been very difficult. Nobody had imagined a spurt in crude oil price from $40 to $130 per barrel in the past five years. I can say with due respect for both governments that given a similar situation, they would have dealt with it in... a similar way. I cannot say that the previous government would have dealt with the situation differently. Where we have collectively gone wrong is that we should have passed on smaller doses of the price hike so that the impact is not so severe today. <b>Dhiraj Nayyar: Is it wise to make upstream oil companies share the burden of oil subsidies especially since India has a competitive advantage in upstream activities? </b> <b>SB:</b> That is why the government has made it a point that the upstream companies would not pay more than Rs 45,000 crore this fiscal year, irrespective of the quantum of under-recoveries on the sale of petroleum products. <b>Zeenat Nazir: Why do the prices of fuel vary so vastly in different states? Is it because of transportation? </b> <b>SB:</b> Sales tax is the major component. Today, sales tax on petrol and diesel varies from 12 to 33% across the country. Transportation is a large component — that is about 10%. Octroi is about 4%. It is ironic that petrol in Mumbai is costlier than in Delhi because its price includes octroi. There are huge distortions along state borders where you find diesel and petrol cheaper across a road. <b>Sandip Das: There are people who have got multiple LPG connections. The three OMCs have data of all these customers. These customers are diverting domestic subsidised cylinders for other purposes — for restaurants or running vehicles. What stops you from checking this? </b> <b>SB:</b> We had started this exercise. There are certain conditions where you can have multiple connections, as in case of having multiple kitchens in the same house. We have asked some to surrender multiple connections. But if we use excessive force then it becomes a law and order problem. People use the plea of separate kitchens in one house. We are trying to bring in technology to check this. <b>Dhiraj Nayyar: On international oil prices, how much are the high prices on account of demand supply imbalances and how much on account of speculation? </b> <b>SB</b>: As far as supply and demand of oil is concerned, there is no doubt that the situation is very tight at 86 billion barrels per day. All the incremental demand is met by incremental production from OPEC countries. Prices are very high today. But it is not just a supply and demand problem. There are various other factors like terrorist threats. Tomorrow if they impose sanctions on Iraq again,... the price of crude may go up further. The spurt in demand of oil is also attributed to the growth of China and India. My personal opinion is that the demand for oil in China would go down after the Olympics.