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Deregulation Need For Deregulation As stated in the chapter on APM, the oilindustry is totally controlled and the policies relating to the industry are fullyregulated by the Government of India. Right from the source of crude procurement, controlsexist till the final distribution of finished products, prices, pattern of production,sales plan of oil companies, product availability, expansion of the industry, andconsequently earnings of the players in the sector. To be fair to policy makers, thecurrent controls did succeed to achieve macro-economic goals of the Government for morethan two decades. With the ushering of liberalization since early 90's, the situation hashowever undergone a sea change and the policy makers have begun to feel that the APM mayno longer work successfully as it had in the past and the energy security of the countrywould be under threat if a robust industry is not created. The factors that have causedthis change can be summarized as under. A sharp increase in demand for petroleum products and increasingly felt need for large investments: In the last five years the demand for petroleum products is increasing compounded annual growth rate of about 6% but investments in the industry has not kept pace with the demand resulting in large imports of crude and finished products. Crude oil production has been plateauing with no new exploratory wells found. The value of imports has increased from less than US$4bn in 1990-91 to about US$13bn in 2000. Large imports can have hazardous effect on the macro economic management, especially the exchange rate and inflation and hence there is need to cap the imports within manageable levels. All this is possible only if the sector is fully opened to attract substantial foreign and domestic investments. Difficulties in periodic adjustment of prices resulting in serious financial problems for the industry participants: With the responsibility of fixing the prices of petroleum products, popular Governments postpone the decision of hiking the prices, even when it is inevitable. This has led to burgeoning oil pool deficit that is slowly threatening to get out of control. The only long-term solution to this problem is that the government should get out of the responsibility of fixing prices leaving them to market forces. Loss of precious foreign exchange due to inefficient use of fuel: Due to cross-subsidization, the market prices of key petroleum products are not reflective of the underlying economic value of the products leading to mass scale inefficiency in use of fuel and sub-optimal inter-fuel substitution. The growth of the industry is more skewed towards subsidized products, resulting in continuous inefficient use of precious foreign exchange. Need to make available inputs to user industries at competitive prices: Petroleum products are vital inputs to key industries and with the economy opening up for international competition, the user industries can become competitive only if the inputs are made available at competitive prices and not at prices fixed by the government which could be at variance with underlying international prices. Difficulty in administration of APM: Administration of APM is becoming increasingly difficult with the partial opening up of the sector allowing private sector refineries. As per the forecasts published by TERI,petroleum consumption is estimated to increase from 97mtpa to 104mtpa in 2001 and grow at6% and above. The foreign exchange required to meet this demand is massive and thus theforeign exchange reserves could significantly influence the availability of energy andthus economic growth. In this backdrop, the country has been increasingly feeling the needfor energy security, which can be achieved only by curbing excessive dependence on oilimports. The Government is aware that this can be achieved only by massive investments inthe upstream and the downstream sector and it is estimated that an amount of US$100bnwould be required in the next 15 years. Such magnitude of investments can be attractedonly if the industry is free of controls. The concept of APM has also outlived itsutility as it has created large oligopolies with no guarantee that the assets are beingput to the most optimal use. The cost-plus formula may also not be workable with newprivate sector entrants into the industry, over whom the Government can exercise littlecontrol. Capital generation in the upstream sector has seriously been affected with theartificially low price of crude paid to the two NOCs consequently the E&P activity hasnot picked up to the desired extent thus resulting in crude oil production stagnating. Theprice distortions of various products has resulted in inefficient energy use and theluxury of bad energy management cannot be prolonged any further. The Government is aware that the need of theday is to build a robust and an internationally competitive industry, which can provideenergy security to the country. This can be achieved only by freeing the industry from allcontrols and by creation of a climate conducive for productive investment in the sector. Process Of De-regulation The process of partial withdrawal ofregulation in the sector commenced with the decanalisation of several petroleum products,permission to new entrants to market LPG and SKO, decontrol of lubricants, awardingproduction-sharing contracts of oil wells and rationalization of tariff structure. In Nov'94, MOP & NG set up a committee under the Chairmanship of Shri U. Sundararajan, CMDof BPCL to provide a framework for the development of Market Determined Price Mechanism(MDPM). The Government also setup a Strategic Planning Group on re-structuring of the oilindustry (R-Group) in January 1995 to develop a financially sound and internationallycompetitive hydrocarbon sector. The R-Group comprises officials from the GOI, economists,eminent personalities from the industry and is headed by Shri Vijay L. Kelkar, SecretaryMOP & NG. The Sundararajan Committee presented its report "HydrocarbonPerspective: 2010 - Meeting the Challenges" in Feb '95 to the R-Group and the Grouphas acknowledged this report to be an important input in preparation of blueprint forrestructuring of the sector. The R-Group has come out with its first set ofrecommendations on exploration & production, natural gas and tariff & pricingreforms in September 1996. The second & final report on issues related to energysecurity, empowerment of public sector and downstream marketing is yet to be released bythe R-Group. In its bid to carry forward the recommendations of the R-Group, the Govt. hasalready announced a new exploration licensing policy (NELP) in Mar '97 incorporating mostof its recommendations. Sundarajan Committee Report Recommendations of Sundararajan committee The consumption of petroleum products islikely to increase to 149 mmt by the year 2010. The indigenous production is howeverdeclining and by the year 2010, only about 27% of the total demand will be met out ofindigenous production giving rise to large imports resulting in serious repercussions onbalance of payments and energy security Suitable policy measures would therefore be enhanced recovery of oil from existing fields, accelerate exploration efforts to find new fields and acquire equity capital abroad create additional refining capacities & marketing infrastructure augment port facilities and pipeline capacities promote foreign and domestic investments in the hydrocarbon sector promote efficient use of oil To achieve this, the sector should becompletely opened up by introduction of market determined pricing mechanism (MDPM) in place of the administered pricing mechanism (APM) removing all restrictions on exports and imports removing restrictions on sourcing & type of crude and the product pattern allowing oil companies to decide on development of infrastructure, mode of transportation, the selection of marketing areas, appointment of dealers / distributors, the amount of commission payable to intermediaries and the sales volumes, purely on commercial considerations ensuring fair competition by setting up a regulatory body to control the market in a transparent manner. Pipelines that are natural monopolies should be treated as utilities and the common carrier principle should be adopted. setting up of an oil commodity exchange to provide an institutional market for exchange of crude and petroleum products at market related prices The regulatory body shall be established undera statute and shall perform the following functions Crisis management in times of product constraints and maintenance of strategic reserves of the major petroleum products to ensure energy security Framing rules for access to pipelines and tap-off points together with fixation of fee for its usage Monitoring selling prices and market positions of the companies Maintenance of a price stability fund to avoid frequent fluctuation in prices of retail products. Ensuring adequate supplies to remote and ecologically sensitive areas Establishing product quality and specifications The hydrocarbon sector should be totallyde-regulated at one go by evolving suitable tariff structure to promote investment in the sector without diluting the revenues of the government by removing subsidies, wherever products are to be subsidized-Central/ State government to directly disburse subsidies and oil companies to be permitted to sell all products at market related rates. Other sector reports Previous chapter Cont'd

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