Tardy progress in oil sector reform

The Supreme Court verdict on the two oil companies' privatisation has rightly been viewed as a setback to the disinvestment process. That conclusion will be valid no matter what follow up legal action is taken after studying the court's verdict in detail.

Overlooked in such an overweening debate over the immediate future of the disinvestment programme are the following: (a) the fortunes of the two oil companies, now that there is an uncertainty over their ownership pattern and (b) whether the already muddled oil sector opening up stands to lose further.

One of the trite arguments against the privatisation of HPCL and BPCL has been that they are profitable enterprises in a sector that has a strategic value to the economy. The second point has in a sense been conceded already when the Government decided to indefinitely retain control of the much bigger integrated oil company, IOC as well as ONGC and GAIL. In fact, the Government has consolidated its ownership in the sector when it made IOC bid aggressively for IBP. Now there is a talk, (admittedly a speculative one), that ONGC might be asked to buy out HPCL. All those are indicative of the Government's intention to keep the commanding heights of the oil sector to itself.

Ensuring the profitability of the public sector oil companies is another issue altogether. The key question here is whether public ownership has been a deterrent to improved profitability. Two diametrically opposite answers are possible. The Government by ensuring a monopoly status has distorted the pricing mechanism. The administered pricing mechanism (APM) formally abandoned only from April 1, 2002, has had its rationale in a different milieu, but was certainly not meant to foster a commercial character among the oil companies. Also the oil companies had to sell certain products at subsidised rates, with petrol consumers cross subsiding the users of kerosene and LPG.

From April 1,2002, there has been a partial opening up of the petroleum sector and many companies, both domestic and overseas, are reportedly finalising their plans. However, there are still stiff entry barriers in the way of meaningful competition, say experts. The nature of the business is such the new entrants will find it prohibitively expensive to compete in the metros. That also explains why the integrated oil companies, BPCL and HPCL, would be so attractive to prospective buyers. A chance to gauge their value is now lost, at least for the moment with the court verdict.

The delay also means that prospective bidders such as Reliance might refocus on setting up a retail network on their own. Whether the emergence of competing retail networks will affect the profitability of the public sector oil companies remains to be seen.

There is however no doubt at all that the continuance of the subsidy on kerosene and LPG will adversely impact on the profitability of the oil companies. The Union Petroleum Minister, Ram Naik, recently announced that the prices of LPG and kerosene would be frozen until February 2005. An election-eve statement such as that has major implications for the government owned oil companies. At present they get a flat subsidy after adjusting for it, the oil companies are expected to mark their retail prices of these two products in line with the fluctuations in the international oil prices.

The freezing of prices effectively means that the oil companies will not be able to increase the retail prices even though oil prices are ruling high internationally. The Government is thinking of a new formula by which the increased cost will be shared by the refining companies, upstream companies such as ONGC and the consumers of petrol and diesel. Whatever else that might signify, the Government's populist decision is not part of the reform agenda. It was announced before the Supreme Court verdict. If the Court had ruled differently and the disinvestment process had proceeded, the decision would have surely impaired the oil companies' profitability. Even now — with the inevitable postponement — it matters both for the reform and the oil companies' profitability.

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