Lavish on wholesale discount; stingy on subsidy

Lavish on wholesale discount; stingy on subsidy
By Vyas

Gloomy forecasts are being written about the first quarter profitability of the three PSU Oil Marketing Companies (OMCs). Reasons for the same are being attributed to burden of the Rs 6,500 crore subsidy on kerosene and cooking gas coupled with non-revision of petrol and diesel prices by the Government due to its political compulsions.

The specter of the Navratna OMCs reporting losses during the first quarter is not acceptable to certain quarters. The Government decided last week that about half of the losses of OMCs would be shared by upstream companies which are making profits due to prevailing high prices of crude oil and gas. The amount of profits to be transferred from ONGC, GAIL and OIL and its distribution among IOC, BPC and HPC has already been announced to partly compensate the marketing companies for subsidies on kerosene and cooking gas. Such sharing of subsidies has been the practise for the past few years now. However, the OMCs are now clamouring for sharing of their losses in marketing of petrol and diesel also with non-marketing oil companies.

Analysts have pointed out that such transfer of profits goes against the principles of good corporate governance. The decision on the quantum of profits to be transferred to loss making companies is done in an ad hoc manner. The point is whether this redistribution of profits is really necessary and whether such level of government intervention is warranted.

The subsidies on kerosene and LPG have continued despite past assurances of their gradual withdrawal. During the Administered Pricing Mechanism period, such subsidies were supported by the margins from other products such as petrol and diesel.

The OMCs were controlling the entire petrol and diesel market, in retail as well as direct segments, till about a couple of years ago. The entry of private players such as Reliance, Essar and Shell ended the monopoly of the OMCs. The new entrants put up their petrol pumps at several locations and quickly gained about 5% market share in the retail segment within the last two years.

The new entrants in the direct segment led to the beginnings of discounts in petrol and diesel market, which were unheard of earlier. Major customers like the Railways and state transport undertakings were offered high discounts by new entrants (even up to Rs 1.50 per litter). Even the PSU Navratna companies hesitatingly matched the discount level to protect their market volumes. The Indian Railways alone is now richer by Rs 200 crores per year due to the discounts it could negotiate for diesel purchase. Many state transport undertakings have also gained through the new tenders finalised by them with discounts on diesel.

It is worth noting that in absence of competition, the Government Navratna companies accumulated high profits on petrol and diesel as the import parity pricing formula used by them included hefty custom duty elements. In this context, the need for a price stabilisation mechanism for petrol and diesel over long term cannot be less emphasised.

Another area where the profitability of the Government OMCs continues to take a beating is the practice of these companies to outdo each other in extending high discounts to direct customers on several other products such as furnace oil, bitumen, naphtha etc. Some of these products are even being sold below the import parity prices by the marketing companies to selected customers. As per some estimates, the OMCs are extending discounts above Rs 2000 crore per year for sales of fuel oils, naphtha and bitumen. For all these products the Government OMCs do not face any private competition.

The reason for such a discount war amongst the Government oil companies is attributed to targets given to them for sales volume and market shares by the controlling ministry. If the money doled out as discounts to the industries was to be used for subsiding kerosene and cooking gas , the burden on the oil companies would go down significantly.

Finally, if Government has to transfer the profits from one set of companies to another set of companies, then the merging of a few upstream and downstream companies to establish few integrated companies is a much better alternative than ad-hoc transfers of profits from one company to another. The integrated companies would also cushion the cyclic fluctuations in the exploration, refining and marketing margins within the same entity.

In this context, the report on Synergy for Energy panel has been quite a letdown and the Government has to take a view to accept or reject the report. None of the existing Indian companies in the oil sector is capable of competing in the international arena for assuring long term oil security for the country. The synergies to be created by merging upstream and downstream oil companies are really required for the country to have some say in the world of five or six oil majors controlling global oil supplies in the long run.