The `pipeline reimbursement cost scheme,' scheduled to be ready within the next three months, will comprise guidelines to help determine a competitive, but profitable remuneration for the commercial use of petroleum-product pipelines. The scheme will be an inevitable bridge between the price decontrol effected last year and freeing of marketing rights in petroleum products, scheduled by 2001-02.

A ministry committee, working out the scheme, is studying the costs of competing modes of transport like road and rail. Sources say the cost of transporting petroleum products by pipelines will have to compete with the the cost of movement by rail and road.

Oil companies rely mainly on the railways, which transports 40 per cent of the nearly 80 million tonnes of petroleum products consumed country-wide.

Road transportcarries nearly 30 per cent of petroleum products.Coastal movement by ships and barges distribute another 7 per cent of the products and the pipelines carry the rest. At present, the cost of transporting the products does not affect the profitability of oil companies owing to a subsidy on freight (borne by the oil-pool account) and supply arrangements among the oil companies.

After getting cabinet approval, the scheme will determine the cost of transporting petroleum products by commercial pipelines like Petronet.

Petronet India Ltd is a holding company, funded by a consortium of oil firms and financial institutions (FIs), which will invest in the industry's pipeline infrastructure.

Subsidiaries spun off by Petronet (in joint ventures with willing partners) will set up and operate product pipelines between refineries and supply points. The key promoters of Petronet are Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), which together will hold50 per cent equity in the holding company.

IOC has over 5,000 km of product pipelines country-wide, connecting refineries to marketing hubs at 10 locations. BPCL owns the 250-km Mumbai-Mankad product pipeline, set up at a cost of about Rs 400 crore.

Existing captive pipelines precluded the necessity of computing a cost for this mode of transport. Oil companies do not charge for transporting oil by pipeline, even when competitors use their network to cater to their own consumers.

Traditionally, oil companies have had ``hospitality'' arrangements that enable them to tap a competitor's pipeline to cater to consumers at inconveniently located markets. For instance, IOC's northern marketing zone is catered to by its six-million tonne per annum capacity Mathura refinery.

IOC's northern region sales, however, are close to 13 million tonnes of petroleum products every year. Some of the ``rail inputs'' of motor- spirit or diesel from Baroda, Kandla and Mumbai for Indian Oil's clientele in the north, comes fromfriendly neighbours in the same business.

Similar arrangements prevail among national oil companies country-wide. Industry sources point out that multinationals engaged in transborder sales also have such supply and marketing arrangements. Those arrangements are obviously negotiated for a fee and are not a gesture of goodwill within a business fraternity.

The emergence of commercial pipeline networks will necessitate guidelines for cost-sharing by users. Those guidelines will make up the scheme. In a market sans distribution controls (which continue at the moment), the profitability of marketing companies will be primarily determined by the cost of transporting oil.

Pipelines, though the most cost-effective form of transport, now carry around 20 per cent of the petroleum products to supply points. Trucks and tankers on the road cart 30 million tonnes of diesel, motor-spirit or cooking gas, while pipelines transport not more than 25 million tonnes of petroleum products.

Petronet and similar ventures,will help oil companies resort to the most reliable and cost-effective mode of transport, at a time when freight will no longer be subsidised. The subsidies on ``freight and under recoveries'' is scheduled to be rolled back. This year 33 per cent of the subsidy is scheduled to be wiped out and the rest will be rolled back in phases. The freight subsidy on supplies of petroleum products to far-flung areas will pass on to the union budget from the oil-pool account by 2001.

The Oil Coordination Committee, which monitors the account and the supply plans of national oil companies, will also have a new role by then. In the last lap of the administered-pricing mechanism dismantling programme in 2001-02, when marketing rights will be freed, the oil companies will be ultimately responsible for their supply and distribution plans. The vanishing controls will only expose oil-marketing companies to more competition. The lowest cost of transportation will then prove a key element in determining their profitability.

Asan industry source pointed out, oil companies will ultimately have to decide where to sell and choose markets closest to refineries or captive pipelines.