Mumbai, March 22: With barely a week to go before the first phase of the oil reforms comes into effect, four state-run oil units have decided to work together to ensure some sort of price stability for the products that will be decontrolled.Top ministry sources said that Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and the stand-alone marketing company, IBP, will join hands from April 1 to pave the way for a "smooth transition" to a market-determined pricing mechanism (MDPM) for select petro products.
The products to be decontrolled are naphtha, furnace oil, LSHS (low sulphur heavy stock), bitumen and paraffin wax.
However, the transition period will see price control continuing for motor spirit (MS), high speed diesel (HSD), kerosene, aviation turbine fuel (ATF) and liquefied petroleum gas (LPG). The phased-out period of reforms, which will continue till 2002, follow the recommendations of a seven-member expert technical group headed by Nirmal Singh, jointsecretary in the ministry of petroleum and natural gas.
Fearing a scenario that could see violent price fluctuations and the likelihood of individual market shares being affected, the four oil companies have decided to work together in marketing products so that there is a semblance of stability for some months at least.
Sources said no decision had been made on the pricing of the five products to be decontrolled and on the marketing arrangement for stand-alone refineries like Madras Refineries and Cochin Refineries.
"Several meetings have been held during the last few weeks, and the oil units are trying to reach an understanding on many aspects with a common goal of protecting their bottomline. After years of operating under the administered pricing mechanism (APM), this sudden shift will need some time for adjustment," sources in the ministry of petroleum and natural gassaid.
They added that at least two more meetings are scheduled in Delhi during the course of this week before the first phase ofreforms gets going.
The companies have acknowledged that only an united approach will protect one another's interests before they can stand on their own feet. "This exercise will be a learning experience, and since risks will be shared, the oil units concerned will be in a better frame of mind by the time the second phase of deregulation comes into effect during 1999-2000," sources said.
There have been talks in the ministry of the units forming their own internal oil-pool account to monitor the pricing pattern. However, there was no confirmation from any of the players on the issue.
The crux of the matter, officials say, is that this is a "completely new experience" which will need careful handling. "Even if this means a temporary extension of the APM and is perceived as defeating the very purpose of deregulation, it is the only way out," sources said, defending the cartel approach of the oil units.
On the subject of deregulation, the Nirmal Singh-led group has noted: "Efficiency enhancementsassociated with a move from APM to MDPM are to the benefit of all concerned in the medium to long run. The indirect benefits through better utilisation of hydrocarbon deposits, higher oil security, a more efficient allocation of resources in the country and, hence, better employment opportunities and higher income will far outweigh the direct costs.
"The transition period can also be used to dispel some of the misplaced fears and apprehensions that exist about pricing reform in hydrocarbons. At the end of the transition period, prices will be determined by the interplay of market forces, competition and enhanced efficiency. These will lead to downward pressure on retail selling prices at the end of the transition period."
The expert technical group had recommended the five-year phase in to be used for: eliminating subsidies on LPG for domestic use within two years and reducing subsidy on domestic kerosene in a phased manner; fixing HSD pricing on the principle of import parity upto ex-storage point withimmediate effect and moving prices of MS and ATF towards import parity in a phased manner; reducing duties gradually to bring the prices of essential imputs and universal intermediates to internationally competitive levels;withdrawal of the retention price for all refineries and moving towards import parity prices to provide incentives for improving refinery efficiency while the existing refineries contribute towards servicing of the oil bonds to be issued to the oil companies by the government during the transition period; encouraging investment in the refining sector through reasonable tariff protection and making marketing rights conditional on owing and operating refineries with an investment of at least Rs 2,000 crore for exploration and production companies producing at least three million tonnes of crude annually; decanalising imports/exports of all petro-products except crude (slop crude and crude condensate), NGL (natural gas liquid), ATF, MS and HSD during the transition period but giving fullfreedom for imports of crude under actual user licensing policy to joint and private sector refineries; passing freight subsidy on supplies to far-flung areas to the fiscal budget and withdrawal of cost plus formula for shipping of crude oil and move towards market-related rates.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
