Oil’s not well that ends well

Around the end of each accounting quarter or immediately thereafter, this sequence of events repeats itself with sickening regularity:

*Crude oil prices change — usually they harden — impinging on the working of the three oil marketing firms.

*They rush to the petroleum ministry with an SOS

*The concerned ministry confabulates with the finance ministry for a bailout package

*The finance ministry, after much pleading and dithering, comes to the succour of the oil majors

*The oil companies, with some imaginative accounting, report a better-than-expected results, after upstream companies also pump in lots of money

This time, though, there has been a deviation from the script.
The government has desisted from issuing oil bonds — even though, the Budget 2009-10 has indicated an amount of Rs 10,306 crore under this head — and in stead has decided to pay a cash subsidy of Rs 12,020 crore to partially make up the losses the OMCs had suffered on the sale of domestic LPG and kerosene.

The release of funds would be through another supplementary demand for grants during the ensuing Budget session.

The third quarter thus has been taken care of, and even though the government largesse is grossly inadequate, the worst has been weathered.

There are other interesting strands to this story. Why is the Centre averse to the issue of oil bonds now? Does this represent a shift in policy? Or, is the foreclosure of this option perhaps a straw in the wind that far-reaching changes are in the offing in regard to the pricing policy of petrogoods?

Will not the payment of Rs 12,020 crore bloat the fiscal deficit, already budgeted at a high level of Rs 400,996 crore by an equivalent amount, other things being equal?

Or has the government decided to merge what is provided for as petroleum subsidy — Rs 3,109 crore — and the issue oil bonds worth Rs 10,306 to finance the cash subsidy now offered to the oil companies as the last and final payment for 2009-10.  

If this move signals a goodbye to the practice of oil bonds, it is indeed a bold step and deserves to be welcomed even if it strains the Union finances.

Larger concerns still remain. What happens if the crude prices harden in the final quarter of this fiscal?

Already, the monthly average price of the Indian crude basket has risen from $50.14 per barrel in April 2009 to $75.02 in December and the undertone is distinctly firm.

This means that the outlook for the January- March 2010 is far from rosy for the OMCs. Will the government bite the bullet and resort to price revisions of petroleum products in the weeks ahead?

If the status quo prevails - and the government sticks to its stand that no further rescue act from it would be forthcoming - margins of the oil companies will be under pressure in the final quarter and the year may end with a cheerless performance.

Compelling the oil exploration companies to compensate the revenue loss suffered by OMCs - the amount involved is sizeable - is, to say the least, an ill-conceived step but the practice is deeply entrenched.

For the third quarter of 2009-10, the outgo is as high as Rs 4,361 crore. Over the years, they have parted with significant sums of money in this fashion - resources that could have been deployed productively by way of ploughback or returns to shareholders.

Government as the largest stake holder may turn a blind eye to this wrong use of funds but what about the rights and expectations of minority shareholders? They have received a short shrift as a result of this policy.

Finally, it is time to learn that there is no alternative to rational pricing of petroleum products. Right from report of the Sunderarajan committee in the nineties to the more recent recommendations of the Rangarajan committee, the deregulation of the petroleum industry has been the focus of much attention but nothing worthwhile has happened.

In stead, ambivalence and ad-hoc measures have held sway, leading to the present impasse. One hopes the findings of the Kirit Parikh panel - expected to be submitted before this month runs out - will meet with a better fate.