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Energy: Regulatory environment improves

Jun 19, 2001

The petroleum sector historically has grown at a rate of 6% p.a. The industry, like others, awaits the unshackling of the Indian economy for the consumption to take off. In the interim period, the Government has taken certain initiatives to boost fortunes of the sector. In 1998, the Government deregulated the refining sector and marketing of de-controlled products (controlled products: petrol, diesel, kerosene and LPG). In April 1, 2001, the Government de-controlled marketing of ATF (aviation turbine fuel). As the final leg of the APM (administered pricing mechanism) dismantling schedule the Government has re-iterated its resolve to deregulate controlled products from April 1, 2002. Refining companies did enjoy a significant upside with deregulation of sector. A similar upside is expected for marketers of controlled products with dismantling of the APM.

However, concerns remain on tackling of the oil pool account deficit. Early talks are of transferring the account to the central budget. The oil pool account closed fiscal 2001 with a deficit of Rs 120 bn (11% of fiscal deficit), which will materially impact the fiscal deficit position. Kerosene and LPG are expected to carry a subsidy of 33.3% and 15% respectively in the post-deregulated scenario. Therefore, will the Government still set prices? And more importantly when will it bite the bullet?

To improve the operating environment of the refining sector the Government has further rationalized the import duty structure in the current budget ensuring a higher net tariff protection. Import duty on naphtha and kerosene was hike by 5%. In another significant move, the import of crude oil has been decanalised for the public sector (PSUs). Earlier, oil PSUs had to import their crude requirements through Indian Oil Corp. (IOC) while the private sector, since 1998, could freely import the natural resource. This could help bring down crude procurement costs for the PSU oil companies.

The Reserve Bank of India (RBI) has permitted oil companies to trade in the oil futures market. Consequently, all refining companies are in the process of setting up an oil-trading desk to reduce volatility in prices and procurement costs. This could lead to reduced raw material costs and more stability in margins and earnings.

Disinvestment is another trigger for unlocking value in the oil PSU stocks. The Government has already put Indo-Burmah Petroleum (IBP) on the blocks and has called for the submission of expression of interest (EoIs). Strategic disinvestment may not go done well with the current management and a possible solution could be to go in for retail disinvestments. This was the case adopted for disinvestment in the Chinese refining company Sinopec.

In FY01, most refining companies installed a diesel hydro de-sulphurisation (DHDS) plant to meet the new environmental norms of 0.5% sulphur content in diesel and 1% benzene content in petrol. More stringent environmental norms could lead to higher capital expenditure for such purposes. Gross refining margins (GRMs) track the Asia-Pacific refining margins, which continue to remain thin. Further, several new refining capacity is planned in the country and this could continue to keep refining margins thin.

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