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Hydrocarbon Vision calls for oil companies privatisation - Views on News from Equitymaster
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  • Jan 14, 2000

    Hydrocarbon Vision calls for oil companies privatisation

    The six think tanks working on the hydrocarbon policy have called for accelerating price and tariff reforms.

    The policy measures that have been called for include:

    • the complete linking of natural gas prices with global prices of fuel oil be made effective from 1.4.2001 rather than 1.4.2002 (Consumer prices of natural gases are at the moment 75% of a basket of fuel oil prices.)
    • the government should bring its stake in the oil public sector units (PSUs) barring Indian Oil (IOC), Oil and Natural Gas Commission (ONGC) and Gas Authority (GAIL) down first to 26% and ultimately to nil.
    • A majority stake in the IOC, ONGC and GAIL should be kept only for three year’s. The stake should subsequently be brought down to 26%.
    • Only companies investing Rs 20 bn either refining or oil exploration and production would be allowed marketing rights.
    • Infrastructure status should be granted to oil pipelines and independent investors should be allowed to construct oil pipelines. This is because almost Rs 1350 bn of investment is required in marketing infrastructure over the next two decades in the form of product pipelines, tankages, retail infrastructure and LPG bottling plants
    • The customs duties on petroleum products should be reduced immediately
    • The Oil and Natural Gas Commission’s (ONGC) overseas exploration arm should be privatised
    • The overseas exploration and production business (E & P) business should be deregulated over the next two decades

    This is the third policy paper the government has come out with. The first was the Sunderrajan Committee report (also popularly known as the R group) which recommended the dismantling of the Administered Price Mechanism (APM). The second was the Nitish Sengupta Committee which was set up to recommend measures to protect stand alone refiners post abolition of the APM. This committee’s recommendations have however been rejected by the government.

    The need of the hour is now to go ahead with the policy implementations. It is quite possible that the government does not want to be caught on the wrong foot by the labour unions as and when the privatisation of the PSUs is undertaken.

    The second reason for the delay in the implementation is that the oil sector undertakings are the most profitable of the Central Government’s 237 PSUs and contribute more than 70% of the profits of the PSUs. The return on the government’s investments in the PSUs is hardly 3%. In effect it is the oil companies which are subsidising the other PSUs.

    Thus though a one time inflow from the oil and gas sector privatisation might enable the government to substantially curtail the fiscal deficit it would immediately call for other imperatives such as PSU privatisation or closure, so that the fisc doesn’t go out of order again.

    If the Hydrocarbon Vision group’s recommendations are accepted it would go a long way in making the oil and gas sector globally competitive. In the initial year’s however the reduction in customs duties would hit margins on regulated products such as petrol, diesel, air turbine fuel etc. The only measure one is not sure about is the requirement that only those companies which invest Rs 20 bn in either refining or oil exploration and production would be allowed marketing rights. The fact remains that refining margins are under pressure and when India is witnessing an overcapacity situation in petroleum products it is difficult to visualise further investment in refining.



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