Chaturvedi panel and oil sector reforms
New Delhi   26-Aug-2008
<b>The Chaturvedi Committee recommendations on how to reform various aspects of the petroleum sector have turned out to be extremely divisive. Three experts debate the coherence and effectiveness of the entire report. <font color=brown>Sarthak Behuria, Chairman, IndianOil</b> Volatility in supply and prices of imported crude oil and capping of the retail selling prices of the four major products - petrol, diesel, domestic LPG and PDS kerosene - has led to a severe squeeze in the liquidity of the oil marketing companies in the country. Living with a continuous nagging thought of how to fund the next barrel of crude oil or how to meet the next item of expense, it should be no surprise that infrastructure and capacity building projects in the sector run a high risk of being approached in a restrictive manner. Viewed against the backdrop of meeting the energy demands of a growing economy that probably requires a six million tonne refinery every two years and matching marketing facilities to reach petroleum products to the consumers, the big question is, where will money come from? The fact remains that the under-recoveries of the oil marketing companies are unprecedented and growing. The current situation not only has huge fiscal implications, but evidently, the capping of prices has also led to diversion and wasteful consumption of this precious resource. For instance, a comparison of diesel consumption between the periods April-June this year and the last year shows an increase of over 11%. Due to artificially depressed prices for diesel, the demand for industrial products such as FO, LSHS, Naphtha, and LDO has been partially substituted with increased consumption of diesel by certain industrial consumers in sectors such as cement, coal, steel, mining, etc, for captive power generation due to severe power cuts in most of the industrially advanced states. The report of the BK Chaturvedi Committee provides a broad package to reform India’s hydrocarbon sector. However, it is crucial that its recommendations are seen and implemented as a package and not selectively. Otherwise, it will spell disaster for the oil sector, especially the standalone refineries. If the recommendation of export parity pricing were implemented, it would wipe out the margins of the refineries and sound their death knell. A periodic graded increase in the prices of major petroleum products, as recommended, should be implemented expeditiously. At the same time, there is an urgent need to implement differential pricing of diesel for direct consumers by offering the product at its economic value. Oil marketing companies do not anticipate any difficulty in implementing market-determined pricing for direct consumers. It is certainly possible that upon implementation of market-driven pricing, some of the marginal industrial consumers could move their patronage to retail outlets since they hold valid licences for limited barrelled storage. We propose that in the larger interest, in order to reduce the impact of market-driven prices on direct consumers, they should be entitled for CENVAT/duty benefits on the consumption of diesel in the manufacturing pro-cess. This approach would also reduce the incidence of possible migration of private direct consumers of diesel to the retail sector. But in the long-term, what is recommended is doing away gradually but firmly with subsidies in the retail prices of petrol, diesel, cooking gas (LPG) and kerosene (PDS). The principle of the right price for the right product and targeting the right users can go a long way in bringing down the high-energy intensity across sectors - household, commercial, industrial, agriculture and transportation - in our country. Subsidies should be targeted and prices of transportation fuels should be aligned with the market. This would be the sole strong determinant of the destiny of petroleum fuel retailing in India. The issues facing the hydrocarbon sector are evident and the solutions are known. No committee is required to address and solve them, what we need today is just the political will. As rightly indicated by both the Rangarajan and B K Chaturvedi committees, the market forces should be allowed to play. It is high time we did aviation or a telecom to India’s hydrocarbon sector. </font> <b>Leena Srivastava, Executive Director, TERI</b> The Chaturvedi Committee report, as expected, has created a lot of controversy and most of its recommendations seem to have been rejected. The committee needs to be complimented for its detailed analyses and for the clear enunciation of arguments on the basis of which it made its recommendations. To the extent that the committee outlined clearly the principles on which the sector should operate - be it in relation to the taxation structure or pricing - it was on firm ground. The minute it started venturing into an effort to find politically acceptable solutions to an obviously vexed problem, it gave shape to the coffin in which the report would rest. Let’s analyse the major recommendations of the report for their merit. The recommendation on the special oil tax, especially for the pre-NELP nominated exploration and production investments, makes eminent sense. ONGC and OIL were the only two public sector beneficiary companies that received large budgetary and process support. In a similar fashion as educational and medical institutions that receive public support have to cater to certain social obligations, the oil companies too must have a responsibility. Undoubtedly, the government has been siphoning off resources from these companies to finance their subsidies. However, a more transparent and predictable tax structure would be much more desirable. Should this tax kick in at prices above $75/bbl or any other figure can definitely be debated. The committee does recognise the need to differentiate in the tax level for non-PSU players. One could even argue that such a tax, possibly at a much higher price band, should be considered for all future investments. Its conclusion that there is no justification for extending this to other parts of the business is again right! The arguments for basing petroleum product prices on export prices is in line with the trend that was initiated when we moved from import parity pricing to trade parity pricing. However, when seen in conjunction with the recommendation on the special oil tax, which will be passed through to the refiners and if this tax comes into being, then staying with trade parity pricing may make for a more stable long-term policy. Differential pricing for any fuel is a regressive idea that should never be part of any recommendations from expert committees. The recommendation to have a separate higher price for industrial diesel is untenable and unimplementable. India has decades of experience where differential pricing between products (diesel and kerosene being a classic example) have led to large-scale adulteration and leakages in the system. Having said that, even the R-group report in 1996 had asked for a graduated increase in prices to reach market-determined levels. The reasons for non-achievement of this are well known - the committee should have suggested an appropriate institutional mechanism for bringing about this convergence beyond saying that pricing decisions should not be left to the government! The Chaturvedi Committee’s report seems to have been summarily rejected. At the same time, be it on attracting investments in E&P activities, or on designing a rational pricing policy, or on ensuring access to the poor - we have failed on all these accounts! It is possibly now time for the petroleum ministry, or indeed the government, to come out with a prognosis paper that would explain to the people of India how they propose to deal with the multitude of distortions that their pussy-footing over the pricing is creating in the economy and how much and what would be the implications of poor policy-making in this sector on development. <b>Subir Raha, Former Chairman, ONGC Group of Companies</b> Wonders never cease. Going by media reports, Oil Marketing Companies (OMCs) subsisting on subsidies have brushed aside the Chaturvedi Committee recommendation for monthly revision of ‘administered’ prices as ‘impracticable’. Pray, what is ‘practicable’? In global trading, commodity prices vary from minute to minute. Just ten years ago, monthly revision of diesel prices was successfully implemented. There are only two options to end price control - just do it, or do it in phases over a pre-set period. Given the prevailing global oil prices, instantaneous decontrol is simply not feasible in a market, which has remained insulated from every ‘oil shock’. Therefore, phased correction is the only choice unless political and commercial -public and private interests have converged to perpetuate the administered price cartel. Expectedly, the proposition to rationalise the pricing structure has provoked outright rejection. The fact is that Indian refiners earn more profit by selling in the domestic market than in the global market. The so-called ‘Indian crude basket’ does not reflect the cheaper price paid for domestic crude, which meets about one-third of the requirement. While the refineries process a mix of imported and domestic crudes (private refiners process only imported crude), the ‘gate prices’ are set on imported products, irrespective of import or export or trade parity. Ocean freight on white oils - petrol, kerosene, and diesel - is higher than that for crude; LPG freight is much higher. While the refiners actually incur the freight on crude, the price build-up accounts for product freight. Insurance and other charges, being ad valorem, add to the fat. There are several such increments in the price build-up beyond the refinery gate. No wonder that all refiners, private sector included, have a vested interest in the present system. Since the new refineries proposed in the public and joint sector remain literally green fields (some proposals have been unceremoniously axed) and demand is inexorably increasing, private sector refiners will now ‘oblige’ the OMCs by agreeing to sell in the domestic market! The recommendation to introduce dual pricing for diesel, by way of ‘metro tax’, is guaranteed to fail. Multiple pricing inevitably leads to black-marketing. LPG is the live example. One hears that the OMCs are going hi-tech to curb diversion of subsidised LPG for commercial, automotive and industrial use: RFID tags will be put on each of the tens of millions of red cylinders meant for household use, and perhaps, we’ll see tracker units criss-crossing the lanes and by-lanes throughout the country. The mind boggles! Sometime ago, GPS tracking of kerosene tank-trucks was announced with much fan-fare. How many kilolitres of kerosene have been ‘saved’ so far? Over last two decades, many reagents have been introduced to detect kerosene adulteration in diesel. How many cases have been proved, and when proved, how many penalties have been sustained? The Special Oil Tax - windfall tax - is eminently justified. This was earlier proposed when the ‘subsidy-sharing’ process was introduced, to bring in transparency and stability. Under the Pool Accounts system, return on all capital investments were guaranteed, and all revenue costs were reimbursed. These funds were sourced from the customers, and therefore, the super-profits, i.e., profits not earned by the companies through normal business operations, need to be mopped up. This is true not only for the public sector E&P companies but also for the refining companies; this is also true for the private sector firms who have bought into such E&P assets of the public sector companies, and who have received handsome tax benefits on the ground that refining is a ‘low-margin’ business! But the proceeds must go into a ‘price stabilisation fund’ to benefit the customers, and not the government who never provided any support to the Pool Accounts.