OPEC and OIL

OPEC meeting of 27^th November, 2014 will be remembered for long for bringing down the oil prices by more than 30% in less than a month in a depressed market and threatening world economy.

The OPEC decision in the aforesaid meeting was apparently taken with a single point agenda to maintain OPEC supremacy and Saudi Arabia’s dominant position in Oil. It is not very clear why Saudi Arabia adopted an unconventional approach.

The probable factors are:

(a)    Threat to the dominant position of Saudi Arabia due to increased production of Shale oil in North America.

(b)   Reluctance of Non OPEC producers (Russia/Mexico) to cut production.

Saudi Arabia and some other  OPEC members believe that the market will settle at appropriate level as producers with higher cost of production will go out of the market—a clear pointer towards Shale and some Non-OPEC producers. It will certainly happen at some point of time as otherwise there will be glut as storage is not unlimited, but may take place after causing considerable damage to the economy of major oil producing nations and to the world economy.

Initially, major oil exporting countries—OPEC or NON-OPEC are going to be worst affected and Oil consuming countries will benefit. However, if the market does not stabiles at $65-75/bbl by February, 2015, it could affect even oil consuming nations due to onslaught of recession in the world economy. This may sound bit paradoxical as not long ago, high oil prices were considered to be detrimental to the world economy. The change in the scenario is due to huge investment in the Oil and Gas sector world over during last decade due to high oil prices after 9/11 leading to tension in the Middle East. If oil prices now go down to unsustainable level, it would result in underutilization of  capacity in the oil and gas sector and even abandoning  investments in projects at various stage of implementation/planning. It means huge unemployment, not only in oil producing nations but also in other countries as capacities/ investment in oil service facilities and equipments will also idle. The impact will also be seen in major OPEC countries including Saudi Arabia, but may be only after a year or so and if oil prices go below$50 per barrel. It is learnt that the Saudi Arabia has planned its 2015 budget at current oil prices i.e. $60 per barrel.

There are 3 major players in this Oil market— Shale Oil producers in North America, Non-OPEC producers (Russia/Mexico) and OPEC.

Let us examine possible scenarios:

Who will blink first?

Will some Shale producers in US cut production?

Most Likely. Some of the shale producers are already planning cut in production, especially those having production cost of $70+/bbl such as Bakken Shale in North Dakota, Permian Basin in Texas etc. As such USA is a great beneficiary of falling oil prices as she is still importing about 7 million barrels oil per day, but the stress in the economy due to unemployment in the oil sector and abandoning of various oil projects including exploration activities in Alaska may jeopardy the US economy, if sub $ 60/bbl prices continue for extended period i.e. second half of 2015

Will Non OPEC (Russia/Mexico) cut production?

The possibility is quite high. It is almost impossible for Russia to survive, if oil prices fall further. Russia needs higher revenue. It is also perceived from market sources that the real issue with OPEC is not Shale producers but Non OPEC producers like Russia. The decision of the OPEC in the 27^th November meeting could have been quite different had Russia agreed to share the cut in the production.

The grey area is the cold war between OPEC and Non-OPEC. Will logic work and better sense prevail?

Will OPEC Cut Production?

Some OPEC members have the capacity to withstand the financial onslaught of falling Oil Prices for considerable time while some others desperately need higher prices. Unless Saudi Arabia agrees to cut production, there is no possibility of cut by OPEC as the impact of cut by other producers will not have any meaning full impact besides inviting the wrath of influential members.

In all probability, the cut in Oil production could come sooner than later and certainly not later than  March, 2015 due to limited oil storage. OPEC cannot afford gradual fall in prices as continued downward trend in prices prompts the consumers to defer import to gain advantage of lower prices, and gives time to the other producers to develop alternative strategies to withstand the adverse impact on economy. OPEC would make all efforts to ensure that the production cut is done by Non –OPEC producers  at the earliest to go back to the Oil prices of $70/75+.

The steep fall in oil prices  during last one month was not only due to the decision of OPEC in November meeting but further escalated by the enhancement of discounts on market linked formula prices by Saudi Aramco for its worldwide customers in the first week of December for supplies in January. This led to similar reduction by other Gulf producers.  This was a master stroke and well thought strategy by Saudi Arabia.

Saudi Aramco is to declare discounts for February supplies on 1^st of January. These discounts will give clear signal of the forward path of Saudi Arabia.

In our best assessment, it is very likely that the Discounts will be further enhanced for February supplies to give knee jerk to the Market. Wait and watch!

Domestic Natural Gas Pricing

Natural Gas pricing announced on 18^th October, 2014 has once again confirmed that it is based on politics and not on Fair market concept. In reality, UPA Government decision in 2007 broke the backbone of Fair Natural Gas Pricing system when Pricing was fixed, disregarding Gas on Gas competition-Arm’s Length pricing envisaged in PSC.Subsequently, it was all politics and nothing else. Let us not forget—it was all intentional to favour one producer.

Pricing Policies:

On 18^th October, 2014, the Government of India announced revision in Natural gas Pricing effective from 1^st November, 2014.The current price from November, 2014 to March 2015 is $5.05/MMBTU based on Gross Calorific Value (GCV) and $5.55/MMBTU on Net Calorific Value (NCV) i.e. on the same basis as earlier price of $4.2/MMBTU fixed in 2007 for 5 years. The revised price is certainly significantly lower compared to $ 8.4/MMBTU; the price almost fixed by the UPA government but could not be implemented.

The issue is not about lower or higher price but Fair Price?

Dr.Rangarajan committee, set up by UPA government based its pricing on:

(i)            Netback pricing of Japanese  LNG,

(ii)            Henry Hub Gas price in USA and

(iii)          National balancing Point (NBP) Gas price in UK.

Pricing Review Committee (PRC-2014) set up by NDA government made following changes to the earlier pricing based on Dr.Rangarajan committee:

(a) Netback pricing of Japanese and Indian import component of LNG is removed.

(b)Canadian (Alberta) gas price is included in lieu of Henry hub Gas price.

© Russian gas price is included in lieu of National Balancing Point (NBP) price of UK.

The notified pricing will be reviewed and revised half yearly

Politics of Pricing!

PRC-2014 is right in removing the LNG component from the Gas pricing formula as price of LNG has no relevance to the price of Natural Gas, but it is not clear why pricing based on Henry Hub is changed to Alberta and NBP to Russian. It is requested that the details are published to bring transparency.

Both Dr.Rangarajan and PRC-2014 have premised that the price of indigenously produced Natural Gas in India is linked to the prices prevailing in various/some parts of the world. It is acceptable, if either Natural Gas in India is the natural home from these locations or it is traded internationally like Oil. Unfortunately, neither is true and therefore, the pricing mechanisms of both the committees are conceptually flawed and unfair.

It appears that Dr .Rangarajan had a pre-scripted Gas Price from UPA and PRC-2014 from NDA government .Both the committees did the rest to please their political bosses. In the absence of details, we do not see any other justification for linking prices to such alien locations having no relevance to Natural Gas produced in India. It is sad that PRC-2014had an opportunity to correct the conceptual flaws and anomalies of Dr.Rangarajan’s formula as expert opinions and criticism on it click were already in the public domain

Real damage to the pricing concept of Natural Gas was done in 2007,when UPA Government arbitrarily disregarded the clause of “Arm’s Length Pricing” of(Production Sharing Contract) PSC and fixed the price of Natural gas at $4.2/MMBTU through manipulated tendering system carried out by Reliance on the directive of  the Government. Today, it is impossible to use the concept of Arm’s Length Price of PSC, which is based on Gas on Gas competition as Indian natural Gas market is imbalanced due to fiasco in gas production in Krishna Godavari basin.

It is true that “international Oil prices are dependent upon geo political factors” But it is sad to note that Natural gas Price is being used as political tool in India and has destroyed the basic fabric of fair pricing.

The issue now arises—what is next?

Forward Path:

We believe that so much damage has been done in pricing of Natural Gas since 2007 that it is now not possible to repair the same and revert back to PSC for existing producing fields. At best, we can prevent further damage and erosion of faith in The Indian system by the stakeholders and international community.

Suggested Mechanism:

In 2007, Natural Gas price was linked to Brent crude oil.  Linking the price to Brent crude oil is not the best option as gas price should be linked to the competing fuel oil, which is Fuel Oil, Naphtha and/or Coal dependent upon its end use. It is true that Brent is internationally traded crude oil with transparent pricing. Price of Naphtha and Fuel Oil are also linked to Crude oil prices. Pricing mechanism linked to competing Fuel is being used for almost 23% of world Gas production and is considered the best method for pricing Gas where the same cannot be fixed on Gas on Gas Competition.

Conclusion:

The Price of Natural Gas in India for existing producing fields should be linked to Oil. It will be desirable to link it to the basket of Naphtha, Fuel Oil and/or coal. Since Gas price in 2007 was linked to Brent Crude Oil, it may also be alright to include Brent Crude Oil  in the basket. Review should take place only if price of one or more of the linked product(s) crosses the band on either side. Otherwise, Formula is binding. 

Gas Price and Modi Sarkar

NDA Government’s recent decision to revise gas price from $4.2/MMBTU to $ 5.61/MMBTU,effective from 1st November,2014 has surprised many. The increase in gas price by $ 1.4 /MMBTU as against the decision of earlier UPA government to increase it to $8.4/MMBTU will certainly convince many that Modi Sarkar Mukesh Ambani Ki Dukan Nanhi hain .It will also give NDA considerable political mileage.

We examined the issue critically and our analysis indicate that it is a very clever move to silent the critics and also to look after RIL interests. As per our experience, Reliance is normally favored only by such moves. Initially a public perception is created through some pseudo moves that the Government decisions are in public interest and anti Reliance. After sometime, Reliance is given more than its expectations. 

Our view is that the present increase in Gas price is not meant for Reliance. The increase is for production from existing fields. Any increase does not bother Reliance as there is hardly any gas production from KGD6, barely 7 to 8 MMSCD.

According to media reports, RIL is trying for deep water exploration wells in Mining Lease areas in KG blocks. The PSCs do not permit this. In this regard,  a Cabinet Note was also prepared in March, 2014 under UPA government but the same could not be cleared due to Code of Conduct for Lok Sabha elections. The possibility of this approval by the NDA Government cannot be ruled out. After all, the core planning is of Reliance. Government is just to OK it.  Once cabinet approval is done in the national interest—to produce more gas indigenously, RIL will have a big Cake. Another price will be announced, much higher, to justify higher cost of production of Deep water drilling. Who can have the objection? What is the Catch?

We have no issue with Deep Water drilling but do have a serious concern, if Cabinet Approval is given to RIL/BP/NIKO consortium as extension of the existing contract.

In this regard, Extract from the Draft Cabinet Note is reproduced below:

 “Article 21.5.12 of the PSC states that “In the event of the Contractor does not commence the development of such discovery within 10 years of the date of the first Discovery well, the Contractor shall relinquish its right to develop such Discovery and the areas relating to such discovery shall be excluded from the Contract Area.  The first discovery in the block was made on 29.10.2002 therefore the ten year period has expired on 29.10.2012”.

RIL press release dated 24^th May, 2013 indicates huge reserves of Gas in deep water at 5000 meters. This test drilling was carried out by RIL-BP in early March’2013 after the government permitted companies to drill exploration wells in areas where exploration period had long expired.

The basic issue arises,” Why Government allowed the consortium to test drill in an area which no longer belonged to them and then prepared a Cabinet note to give a go ahead signal.

We welcome new discoveries and development in Oil and Gas Exploration. However, permitting Reliance under the existing contract should not be allowed. The contract should be awarded on the basis of fresh International bidding so that the nation gets its due share.

We would like the Government to clarify its position on:

Q1. Is Government considering Deep Water  exploration drilling in  Mining Lease areas of Krishna Godavari Basin to increase Gas Production?

Q 2 Do the PSC provisions permit such exploration drilling 10 years after first discovery as extension of contract to the existing contractor?

 Q.3 In case Deep Water drilling is envisaged in ML areas will it be carried out by the existing consortium of RIL/BP/Niko or will there be fresh International bidding?

Prime Minister Modi's Maths

Prime Minister Modi ,during his visit to Japan, has repeatedly claimed success of the initiatives taken by him and his Government in achieving 5.7% growth for India within 100 days of the formation of his Government. It is by no means a less achievement by any Government.
However, scrutiny of the data brings an amazing picture and I wonder "How PM Modi has not been appraised correctly by the Finance Minister and other economists in his Government?"
Let me highlight these facts:
GDP of 5.7% is for the Quarter April-June 2014. Modi Government came into power on 26th May,2014,which means this milestone of 5.7% growth was achieved within 35 days AND NOT 100 days. If so, People of India should expect a growth of nearly 9-10% for the 2nd quarter and still higher,say 12-13% for the 3rd quarter.(Modi Government will complete  125 days and 215 days by the end of 2nd and 3rd quarter of FY 15).
We are really looking for real Ache Din.
There is one more view point  and I believe that it should also be presented: 5.7% growth is for the period 1st April-30th June,2014.Prior to Modi Government,there was UPA Government for 45 days and lame duck government for 10 days.Do we give part credit of higher growth to UPA Government as well? The response is likely to be "NO"  If so,the other possibility could be ," Actual growth for 55 days prior to Modi Government was very very low and it is only a growth of nearly 10% or so during the 35 days period of Modi Government(26th may to 30th June,2014) boosted the average growth for the quarter to 5.7%."

Sir, We all will know the truth and clear position by the end of 3rd quarter FY 15. Let us not forget that
1st Q was dominated by  the General Elections leading to lot of economic activity. GDP for 2nd and 3rd quarter will have the positive impact of festival season. Nevertheless,GDP of  more than 6%  for both the forthcoming quarters will indicate definite improvement in the economy. Otherwise we will be searching Ache Din under the carpet.

Panel for Gas Price Formula

“Report of the Committee on the Petroleum Sharing Contract Mechanism in Petroleum Industry” headed by Dr.  C.Rangarajan was submitted to the GOI in December, 2012.It suggested a formula for pricing the Natural Gas produced in the country, which industry experts believe gave the UPA government much wanted weapon to revise the price from $4.2/MMBTU to $8.4/MMBTU.

The formula suggested by Dr.Rangarajan lead to unprecedented debate among the industry experts. Many prominent experts questioned the very motive of such a ridiculous formula. The controversy on gas pricing formula led to filing two PILS in the Supreme Court and became hot political subject. It is generally believed that the formula and later on price fixation by the UPA government was orchestrated to benefit Reliance Industries at the cost of exchequer. In reality most experts believe that Reliance Industries should get no more than $2.34/MMBTU as per the contractual terms of PSC for KGD6 and increase from $2.34/MMBTU to $4.2/MMBTU was a fraud by UPA Government in 2007.

Despite the best efforts by the then Government, the gas price revision could not be implemented as Election Commission directed the Government to defer the decision in view of  model code of conduct due to the General Elections.

Realizing the controversy and the mood of the nation, the BJP Government under the leadership of Mr.Narendra Modi deferred the Gas Price revision by 3 months to review the Gas price Formula and related issues. A panel has now been appointed under the Chairmanship of Mr. Suresh Prabhu, former Power Minister and a prominent leader of Shiv Sena.

Appointment of Mr. Suresh Prabhu is based on the proposal of Ministry of Petroleum and Natural Gas to set up a panel of “a group of eminent persons” to assist the Government in formulating “an appropriate view”

There is no doubt that the proposal and idea is good. But the big question arises about the very selection of the Head of the panel. Is it as good as the panel headed by Dr.C.Rangarajan, selected by the UPA Government?

It is widely known that BJP got huge financial favors from Reliance for the campaigning in the General elections 2014.So far BJP has not come out clean about the election expenses and its funding. It will not be out of place to assume that this panel, headed by BJP /Shiv Sena politician is meant to give necessary ammunition to the Government to return the favors to Reliance. Is this panel a cover for another scam in the making?

We have some serious concerns.

·         How come BJP Government had to zero down on a politician with no expertise in Oil and Gas business?

·         What are the credentials of Mr.Suresh Prabhu to justify the appointment as Head of Gas Pricing Panel?

 Is he a man of impeccable integrity? Is he an expert in oil and gas business?

·         What are the criteria of MOP&NG of” eminent persons”?

·         Does MOP&NG believe that eminent, honest persons with integrity are available only among politicians and various panels should be headed by its crony?

·         Is gas pricing a political issue or techno-economic issue?

·         Could MOP&NG not get eminent independent experts with integrity from the industry?

·         Why MOP&NG is relying on DGH for technical support, when its credentials are already known in handling various issues relating to KGD6 as already highlighted by CAG in its reports on KGD6?

We suggest that:

 Group of apolitical eminent persons be asked to suggest the name of Head of the Panel and its members.

Alternatively,

GOI should await the decision of the Supreme Court as the matter is already under its considerations.

War on Gas Price:Kejriwal Vs.Mukesh Ambani

UPA government’s decision to increase price of Gas from $4.2/MMBTU to $ 8.4/ MMBTU from 1st April, 2014 prompted the Delhi Government headed by the then Chief Minister of Delhi, Mr.Arvind Kejriwal to file  FIR against Reliance Chairman, Mr.Mukesh Ambani,Petroleum Minister Mr.Moily and 2 others who are believed to have conspired in unfair,unjust increase in price of Gas in voilation of the provision in the Production Sharing Contract for KGD6 fields.Though 2 PILs were earlier filed in the Supreme Court  by the eminent people through well known cunsellors,but filing of FIR by the Government led by Mr.Arvind Kejriwal has started virtual war between Aam Aadmi Party and Reliance,the main beneficiary of this increase in price of gas at the cost of exchequer.
  Recently, some articles have started appearing in the leading newspapers in support of higher price and thus,supporting Reliance and Government of India.
One article was published in The Indian Express on 15/02/2014 authored by Mr.Vikram S.Mehta—Fuelled by Ignorance—The AAP led debate on Gas Pricing betrays a lack of Understanding in the industry. The second article was published in the Times of India on 16th Feb., 2014 by Mr.Swaminathan –FIR Against Moily? As absurd as one against Kejriwal.
It is interesting to see how both these articles are trying to justify that the real beneficiary of increase in price would be ONGC and other National Oil Companies and NOT Reliance.After reading both these articles, I was reminded of a 20 year old incidence when Reliance got an article published in a leading newspaper in the name of someone,though written by its own employee.Once again  I am wondering “Who is the real author of these articles? Will some more such articles appear in  the near future?”
(1) Both the articles by Mr. Vikram S.Mehta and Mr Swaminathan have very cleverly ignored the real issue of pricing basis envisaged in Production Sharing Contracts of KGD6.  Mr. Mehta has mentioned that  ONGC produces  85%of the total gas production in the country and as per  Mr.Swaminathan Reliance gas production  is just at 10%. Both the authors have not mentioned “How these figures have been arrived at?” It appears that these figures are current for recent months as Gas production by Reliance from KGD6 is around 10MMSCMD i.e at its lowest level. There is no mention that Reliance is expected to produce 80MMSCMD gas from KGD6 and some additional quantities from other fields. In reality, gas production from Reliance could be more than 60%. In fact, production of Gas by Reliance in 2012-13 was more than 30% of the country’s production.
(2) Mr. Mehta has justified the pricing basis recommended by Dr.C Rangarajan without realizing that the recommendations are in violations of the mechanism   given in PSC. Can Mr. Mehta explain “How LNG can be treated same as Natural Gas just as Dr.Rangarajan has considered in its report.?” What is the relevance of price of Gas in Europe or USA for the gas produced in India? Should the pricing of Gas not based on PSC?
 Mr. Swaminathan has also justified the recommendations of Dr.C Rangarajan  and tried to brand him upright  and not pro Reliance as he was asked by Mr.Jaipal Reddy, previous Petroleum Minister, who was anti Reliance. It will be better,if Mr.Swaminathan concentrate on the real issues rather than awarding certificates of integrity or honesty or brand someone pro or anti. Let us look at the recommendations of Dr.C Rangarajan and then decide whether these are fair or pro Reliance. . According to PSC,” Valuation of Natural Gas would be on the basis of comprehensive arm’s length sales in the region for similar sales under similar conditions. The formula or basis on which prices shall be determined shall be approved by the Government, which will take into account the prevailing policy, if any, on pricing of Natural Gas, including any linkages with traded fuels.”
Can Mr.Swaminathan or Mr. Mehta or Dr.Rangarajan justify “How the gas price recommended by Rangarajan Committee is based on Arm’s length sales in the region?” The only price that was discovered on arm’s length sales was $2.34/MMBTU.
(3)  Mr.Swaminathan has further justified market and higher price as State oil companies are demanding higher prices. Well!  State oil companies are also asking crude oil prices on international pricing basis. Why GOI is taking discount from State oil companies to meet under recoveries for the Refining and Marketing companies.
(4) Mr.Swaminathan has also stated” All Gas exploration contracts say that gas discoveries can be sold at market price” It is not known which contracts are being referred to by  Mr.Swaminathan. We know for sure that the contract related to the present issue certainly does not support his statement.

Pricing of Petroleum Products in India

Summary:

The pricing of Petroleum Products in India was changed from Administered Pricing Mechanism (APM) to Free Market in 2002, but the occasional governmental intervention for political reasons is leading to distorted pricing for major products. Moreover, the Free Market Pricing is so designed that it is unfair and unjust to the consumers. Further, the Duty and Tax structure appears to be ad hoc which violates the basic fundamentals of free and fair market prices.

(1)  Prices of indigenously produced petroleum products are based on Import parity. What is the justification of padding up the prices with ocean freight, custom duty etc. when no such cost is being incurred by the seller?

(2)  Under- recoveries and subsidies on Diesel, PDS Kerosene and LPG are being paid by the government to Oil Marketing Companies (OMCs) to enable them to sell these products below the market price. At the same time Excise Duty, Educational Cess and Sales Tax are being levied resulting in increase in prices. During 2012-13, Rs. 161029 crores was paid to OMCs as under recoveries. In addition, the Government of India also subsidized Kerosene and LPG to the extent of Rs.2730 crores. At the same time, the Government of India recovered Rs.22,916 Crores as Excise duty on Diesel and PDS Kerosene only during 2012-13.

In short, rationalization of petroleum product prices and duty structure can benefit the consumers with lower prices; reduce under-recoveries and subsidies to the bare minimum.

Petroleum Product Prices in India:

Administered Pricing Mechanism (APM) was dismantled in April 2002 but prices of major petroleum products continued to be controlled and dictated by the Government directly or indirectly for various political and social reasons.  In June, 2010, Government of India decided to free Diesel prices but it is still not completely free.

Pricing of major petroleum products under the Free market are based on the recommendations of the C.Rangarajan Committee, Feb., 2006.This was further reviewed and modified by the Expert Group headed by Mr.Kirit Parikh, Former Member Planning commission in October, 2013

The C. Rangarajan Committee recommended Ex-storage Point Prices (ESPP) for indigenously produced products on Import Parity (IPP) and the Kirit Parikh committee justified the same basis on the considerations that it was recommended by the Rangarajan Committee. The dissenting note of Dr. Saurabh Garg, Jt. Secretary, Plan Finance II, Ministry of Finance was brushed aside by Mr.Kirit Parikh and Prof.Barua with completely unacceptable arguments. In the Rejoinder to the dissenting Note of Dr.Garg, Dr.Kirit Parikh stated:

(a) Domestic refineries need protection by allowing them to price the products on IPP including custom duty, whether it is actually paid or not. Protection is justified as a few Eastern refineries are having negative returns. It is not understandable whether the scope of the committee was to recommend proper pricing mechanism or look into the economics of individual refineries. Refinery economics issue should be left to the concerned organization and administrative Ministry. If policy makers start distorting pricing mechanism for extraneous considerations, then what is the idea of having an expert group to decide free market pricing mechanism?

(b) Dr. Kirit Parikh has justified payment of CST to give incentive to private refiners as otherwise they would export HSD. Private refiners will export products only when actual realization from export will be higher than the realization from home market. This could happen at times when international product market is tight resulting in higher realization from exports. The same refiners will scramble to push maximum products in the home market when international prices are weak. The pricing structure need to be fair so that the refiners get fair price i.e the average price that they will realize through exports during the year and not on month to month basis. During the year pricing mechanism based on EPP should be fair to both seller and consumers.  They need to supply products required within the country at export parity price and export surplus products, if any. These refiners have set up excess capacities, keeping in view future demand as it is always advantageous to sell products in the home market. If they do not fall in line, Government should consider imposing Export Tax.

© Mr. Kirit Parikh has further tried to justify IPP on the premise that 80% benefit will accrue to Public Sector refineries. This appears to be a very hollow argument. The issue is not who is getting the benefit of higher prices but whether the pricing is fair to all stakeholders.

(d) The logic provided by Prof. Barua in his rejoinder makes one believe that the decision was taken first to fix prices of indigenously produced products on IPP and then the same are being justified as minor differences. It is difficult to understand why such illogical arguments are being given to justify a lop-sided pricing mechanism. Why can’t we go with the right pricing mechanism rather than justifying the biased pricing mechanism? Is it important to give incentive in price even after giving so many incentives to these private refiners  at the time of conceiving the project- land at very low price, tax holiday etc. It appears that members of Expert group and policy makers are too scared of private refiners and are finding excuses to appease them. The fear that the private refiners, if not given additional incentives, may export the products which will result in higher cost of import is absolutely unfounded as already explained in (b) above. If Refiners still resort to arm twisting, the government needs to act firmly rather than surrendering.

.

 The Indian Petroleum Industry has always been a milking cow for the Central as well as State Governments. Subsidies on HSD, PDS Kerosene (Public distribution Kerosene) and LPG are being given to keep the prices low in the interest of Aam Aadmi (common man).  Refiners and Marketing companies are compensated for the under-recoveries for keeping the prices lower than the market.

Some of the main issues in pricing are outlined below:

(a)   After in-depth studies of the Pricing Mechanism of Petroleum Products in India, one wonders if our policy makers are clear about what are the aims and objectives of the policies they formulate. (i) Do they want higher domestic prices to benefit oil companies or lower prices to benefit the consumers or fair price for all? (ii) Do they want to artificially jack up the market prices so that a bogey of subsidies and under-recovery is created to fish around with the prices to benefit some, at the cost of tax payers?

.

(b)  Salient features and recommendations for revised pricing policy

b (i) Crude Oil:

India imports nearly 85% of its crude oil requirements, which attracts Rs.50 per MT as NCCD (National Calamity Contingent Duty). This duty impacts prices of all petroleum products including Diesel, Kerosene and LPG resulting in higher under-recoveries and subsidies?

Recommendations: Make Custom Duty (NCCD) =NIL.

Recover equivalent amount from Non subsidized products

b (ii) Petroleum Products:

Prices of major petroleum products-Motor Spirit (Petrol), Kerosene and Naphtha is based on Import parity (IPP), including custom duty, freight, insurance, port dues etc. Price of diesel is based on 80% IPP and 20% export Parity (EPP) on the basis of the Kirit Parikh report.

Comments:

(1)  Prices of all products produced indigenously should be on EPP and for imported products on IPP. 

(2)  It is difficult to understand the rationale of import duty on MS and Diesel. In 2012-13, we imported only 0.147 million MT MS and 0.626million MT HSD but exported 16.657 Million MT MS and 22.464 million MT HSD.

Major Products:

HSD (Diesel):

During 2012-13, Oil companies were compensated to the extent of

Rs.92, 061 crores for under-recoveries on diesel. Prices of diesel are now being increased on a monthly basis by approx. Rs.0.50/litre per month since January, 2013 to reduce under-recoveries. However, due to falling rupee with respect to US $, under recoveries on Diesel may remain around Rs.100, 000 crores in 2013-14 with current pricing policies.

 Currently, Ex Storage point Price (ESPP) of HSD is based on 80%IPP and 20% EPP. This ratio has been justified by the Kirit Parikh report on the consideration that 20% HSD is being exported. Export of 20% HSD has no relevance to pricing.HSD is being exported as it is surplus.

Recommendations:

Diesel price should be based on EPP price.

  This will reduce the ESPP of BS-III grade HSD by more than Rs.2 per liter and reduce under-recoveries by almost Rs.20,000 crores

 PDS Kerosene:

During 2012-13, oil companies were compensated to the extent of Rs.29410 crores for under-recoveries on PDS kerosene. In addition the Government gave subsidies to the extent of Rs.741 crores on 7.5 million MT PDS kerosene

Recommendations:

Current Ex storage Point Price (ESPP) is based on IPP, which does not make any sense as there was no import of Kerosene in 2012-13. Its price should be based on EPP.

This will reduce the ESPP SKO by more than Rs.2 per liter and reduce under-recoveries by almost Rs.1500 crores

 LPG:

During 2012-13, oil companies were compensated to the extent of Rs.39558 crores for under-recoveries on LPG. In addition, the Government gave subsidies to the extent of Rs.1989 crores on 13.6 milion MT LPG for domestic use.

Recommendations:

During 2012-13, 6.3 million MT was imported i.e. about 40% of the total requirement. Retail price of LPG should be fixed on the basis of IPP. However, ESPP for LPG produced domestically should be based on EPP and for Imported LPG on IPP. Difference in the ESPP of indigenous and imported LPG should be adjusted against under-recoveries payable to OMC for LPG. On the basis of 1/10/2013 prices considered in the Kirit Parikh report for LPG, under recoveries for LPG will reduce by  Rs 2500.crores in 2013-14, if  subsidized LPG remains at the same level as in 2012-13.

 Motor Spirit/Naphtha:

Pricing basis of all other major products, Motor Spirit, Naphtha, ATF etc are also based on IPP though there is hardly any import.  ESPP of all these products should be changed to EPP which will result in reduction in price by almost Rs.3000 per MT. If ESPP is fixed on EPP basis and retail price is kept at current level, MS and Naphtha could yield more than Rs.10000 crores to the government as excise duty, which can be utilized for reducing under-recoveries/subsidies on other products.

Some Other Important Issues:

(1)  HSD attracts Excise Duty/Educational cess of Rs.3563.8/KL .While price of HSD is being kept below the market rates and under-recoveries are being paid to oil companies, price is being escalated through excise duties. It may be desirable to abolish excise duty from HSD to reduce under-recoveries.

(2)  Most States have imposed hefty VAT on all petroleum products, including HSD, PDS Kerosene and LPG. It is suggested that VAT on these products should be abolished or restricted to bare minimum say less than 5% so that basic price of these products could be increased without adversely affecting the burden on the consumer. Loss in revenue to the states due to lower VAT on these products should be made good by plugging leakages in tax collection on other commodities.

(3)  It is well known that due to significant difference in price between PDS kerosene and Diesel/MS, substantial quantities of Kerosene is being diverted to HSD/MS. This misuse need to be stopped so that (1) benefit of subsidized kerosene is made available to those who need it and (2) Under-recoveries /subsidies on PDS kerosene is reduced. It is suggested that :

(a) Price of Kerosene should be increased to bridge the gap between Kerosene and HSD/MS prices.

(b) Direct credit of subsidy, similar to the scheme of LPG, should be considered to curb mis-use of PDS kerosene.

Conclusion:

(1)  Custom Duty (NCDD) should be made Nil on crude oil.

(2)  ESPP should be fixed on EPP for indigenously produced products and on IPP for imported products.

(3)   For Products which are being imported as well as produced indigenously such as LPG, ESPP and hence retail price should be based on IPP. However, for the quantities produced indigenously, differential of IPP and EPP should be recovered from Oil Marketing Companies to adjust against Under-recoveries/Subsidies.

(4)  Excise duty and VAT on HSD, PDS Kerosene and LPG should be made Zero or bare minimum.

FDI-Retails

The Chief Minister of Delhi, Mr. Arvind Kejriwal has decided not Allow FDI in Retails in Delhi and thus, reversing the earlier decision of the Congress Government.

It is fine not to have FDI in retails as Retails Marketing is in no way a high Tech venture where country needs foreign help or cannot do well without foreign investment. It is also true that FDI in retails will increase unemployment and this is not acceptable to our honorable Chief Minister of Delhi who is pro Aam Aadmi. It is quite well known that several states in USA have opposed setting up of big departmental chains like Wal-Mart for the same reason. If there is opposition to Wal-mart in USA, why should we welcome it in Delhi?

It is fine to say NO to FDI in retails as long as the decision is based on intelligent analysis and not for political gains alone.

In this regard, I would like to submit for the kind consideration of The Chief Minister of Delhi, Mr.Kejriwal to address the following disadvantages of saying NO to FDI in retails:

(1)   Most shopkeepers do not give any cash memo, resulting in poor collection of taxes and generation of Black money.  Aam Aadmi party is committed to minimize black money. Does Party have a roadmap to address this issue?

(2)  Food and Drug adulteration is a serious health problem. Food Safety department is completely in effective in Delhi in handling samples from small shops besides in effective and impractical Food Act. This problem would be very much under control, if Retail Marketing is restricted to few big chains.

(3)  The experience of some western countries indicate prices will be lower , if FDI in Retails is allowed due to better management of supply chains, effective storage system, lower wastage etc. This would mean wealth creation for the people, lower inflation and better quality of life for most.

It is requested that a Task Force of Chief Minister should look into these issues and suggest concrete action plan.

Some of my suggestions are:

(a)  Develop modern Food Storage facilities by involving reputed national as well as international companies with good track record. These facilities should be managed by professional companies to minimize wastage.

(b)   Develop procurement system to minimize pilferage, corruption.  With minimum Government controls.

(c)   It should be mandatory to give computerized cash memo for all purchases.

(d)   The Food Act 2006 need to be reviewed and made meaningful and consumer friendly to ensure

 (1) Consumer is able to collect the sample without any problem (At present sample should have the signature of seller and there is no remedy, if seller refuses to sign).

(2) Results of samples tested in any accredited laboratory should be acceptable by law. (At present only samples tested in Government labs are accepted for legal action.

(3) Testing and action should be completed within 3 months (At present action is pending even on samples collected in 2004.