Walk the talk, Mr Naik

Missing its target for deregulating the sector by April 1 is just one of the oil industry’s woes

RIGHT around now, perhaps, Petroleum Minister Ram Naik is busy finalising the list of his achievements for the annual appraisal report he submits to his constituency. This lists what he has done for his members, the letters he has written, the questions he has asked in Parliament and now, presumably, even his record as minister.

It’s difficult to know exactly what the report will say, but chances are it will talk of the mini-refineries he has inaugurated, the new LPG outlets, and the letters asking the OPEC to supply crude oil at a lower prices because India is a poor nation! Chances are, glossing over the chaos in the capital due to the ministry’s pathetic implementation, the report will even talk of the number of CNG stations set up in record time. But this column is about what the report will not say.

Anxious to calm people after the September 11 attacks, when oil prices rose dramatically, Naik told reporters he was in the midst of finalising a plan to increase India’s strategic reserves from 20 days right now to two months — that way, even a war would not seriously worry India. Now no one is saying that tripling India’s storage capacity for oil can be done overnight but it has been over two months and nothing has moved on this plan.

It gets worse. Four months from now, the government is committed to fully freeing up the oil sector — today, prices of items like petrol, LPG, and kerosene are fixed by the government. While Naik has reiterated his intention to stick to the deadline — this is the only way you’ll get more investments and increased efficiency — that looks increasingly impossible as subsidies on kerosene and LPG need to be cut massively. Naik has already publicly said he can’t meet the LPG target. The reason is that while subsidies were to be cut gradually over the last three years, this was not done. Kerosene and LPG subsidies were last cut 15 months ago. Indeed, Naik added to the problem by sanctioning one crore new LPG connections this year — this may have got him some goodwill but has also added over Rs 1,000 crore to the annual subsidy bill.

Forget LPG, prices of diesel were deregulated 30 months ago and were to move in tandem with global prices — they should, in fact, have fallen now as oil prices are very low. But even this was not allowed, and there is a huge subsidy even on diesel where prices are technically market-determined.

In order check the ballooning oil pool deficit, Naik has done a greater perfidy. He has dramatically cut the money that is paid to PSU oil producers like ONGC. Under the plan drawn up for freeing the sector, ONGC and other producers were to be gradually paid global prices for their oil. By now ONGC should have been getting 87.5 per cent of global prices — so that when prices crossed $30 a barrel post-September 11, ONGC should have been paid $26. What it got instead was $17. Why? Because the government decided, that’s why.

There’s a caveat. Even if oil prices crash, ONGC will never get less than $10. So, it will never get to feel the heat of a crash in oil prices, nor ever be really forced to get efficient. It follows that it will not benefit from the highs either. So, if oil prices dip further in a world gripped by recession, when D-Day approaches on March 31, ONGC’s Subir Raha may be forced to tell Naik he is not ready to face the free world — that will be due to Naik’s policy of not allowing ONGC to get used to market-pricing.

Nor have other PSUs, like the marketing firms of IOC, HPCL and BPCL, fared much better. Clearly, once the market is freed and even global majors are allowed, competition will hot up dramatically. Consumer satisfaction, at that juncture, will be critical. But between them, IOC, HPCL and BPCL needed around 6,000 dealers more, or around a fifth of their current network. These were to be appointed by government-nominated boards set up four years ago, but there’s still a backlog of over 4,000 due to constant bickering over who was to be favoured. While the Reliances and the Shells will woo customers with their superior service, PSU majors are still not free to appoint their dealers, nor able to sack those whose service was poor.

There’s more. India’s oil production has been stagnant for years but private firms who could easily produce a million tonnes of extra crude have not been able to get mining licences as the state governments want a higher royalty. The firms are functioning on temporary work permits and are naturally not interested in going all out to hike production. Despite its talk, the ministry hasn’t been able to resolve the matter for over six years now.

Instead, it has been more interested in playing politics, to figure out how many new regulators have to be appointed post April 1 — the more you have, the more appointments for retired bureaucrats. Ironically, there’s a body set up several years ago, the Directorate General Hydrocarbons (DGH), to eventually become one such regulator for upstream activities, with just a minor modification to the 1935 petroleum act. But the DGH is to be carved up, and a totally new lot of regulators to be set up. Wake up, Mr Naik.

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