Last year, the union minister of petroleum and natural gas [MPNG], Dharmendra Pradhan had set up an expert committee under Dr Kirit Parikh to “look at various issues related to implementation of existing guidelines for grant of marketing authorization of market fuels – petrol, diesel and aviation turbine fuel [ATF], identity entry barriers, if any, for expansion of retail outlets for private marketing companies and recommend easing of fuel retailing licensing rules ”.
This was in the backdrop of persistent demand from various stakeholders for relaxing extant norms for granting authorization for marketing of oil products with a view to get more private players into retailing so as to increase competition, reduce price, improve services and give more choice to consumers. The minister responded by constituting the committee.
On October 23, 2019, the government announced major changes in the subsisting licensing rules. These include dispensing with the requirement of minimum investment of Rs 2,000 crore in oil or gas infrastructure viz. hydrocarbon exploration and production, refining, import terminals, transportation etc. The applicant should have minimum net-worth of Rs 250 crore and also invest in marketing of at least one new generation alternate fuel such as CNG, LNG, bio-fuels and open 5 per cent of total outlets in rural areas.
The requirement of Rs 2000 crore investment and that too in the hydrocarbon infrastructure was a major entry barrier. Doing away with this and significant lowering of financial worth – irrespective of the area the applicant was operating – will make the field open to a large number of investors; though, imposition of caveats viz. investment in renewable and rural outlets is an avoidable restriction which will reduce to some extent flexibility available to them.
Hitherto, marketing of petroleum products has been the monopoly of public sector undertakings [PSUs] in the downstream oil sector viz. Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL]. Out of 63,498 petrol pumps in the country, 27,325 are with IOCL, 14,565 with BPCL and 15,255 with HPCL which add up to 57,145 or about 90% of the total.
On the face of it, one gets an impression that private firms will start participating in a major way. But, this is easier said than done as at a fundamental level, the conditions are far from conducive. The proof of pudding is in eating.
The global energy majors for whom subsisting rules in particular, Rs 2000 crore investment in oil and gas infrastructure was never an entry barrier have shown little interest in opening retail outlets. A couple of years back, British Petroleum [BP] plc of UK had secured a license to set up 3,500 pumps but hasn’t yet opened one. Royal Dutch Shell – another energy conglomerate of UK and Netherlands based MNCs – operates just 114 pumps. Even Reliance Industries Limited [RIL], which operates the world’s largest oil refining complex has less than 1,400 outlets.
What are the major bottlenecks in the way of even these eligible [albeit under erstwhile rules] candidates take a plunge? What all is needed to make them invest?
First, for a private firm to be able to successfully run an oil or gas pump, it should have uninterrupted access to supply in desired quantities. For this, it should be free to source products – from imports or domestic refineries – and have hassle free access to infrastructure for storage, handling, import terminals and transportation. But, it is hamstrung as imports of LPG, liquefied natural gas [LNG], diesel, kerosene, are canalized through PSUs viz. IOCL, BPCL, HPCL and Gas Authority of India Limited [GAIL] even as an overwhelming portion of the infrastructure is also with them. Put simply, the ability of former to run its business is largely controlled by the latter.
Second, private firms are also handicapped due to the extant policy of routing subsidy through oil PSUs only. Until 2010, all major products viz., petrol, diesel, LPG and kerosene were covered by subsidy scheme. Under it, PSUs were asked to sell the products at prices below their cost of supply and reimbursed for the difference between the two. However, in June, 2010/November, 2014, petrol/diesel were deregulated and subsidy withdrawn. From January 2015, it switched over to direct benefit transfer [DBT] of LPG subsidy.
The routing of subsidy only through PSUs puts companies in private firms to a serious disadvantage. This is because without subsidy, it is impossible for the latter to match the price offered by the former [albeit with subsidy support]. Although, withdrawal of subsidy on petrol/diesel has removed discrimination with respect to their sales, continued subsidization of LPG and kerosene – vide oil PSUs – remains a major deterrent.
Even in respect of petrol/diesel, the government often gives oral instructions to PSUs not to increase the price even when it is warranted as per underlying factors viz. hike in their international price [this happens especially during election times]. This compels private companies to act likewise or else they will run the risk of losing business.
Third, the extant policy of pricing petroleum products [POL] though touted as market determined, in reality, it is a blend of formula-based and actual. The PSUs fix retail prices by adding freight, marketing costs, marketing margin, dealers’ commission and taxes and duties to refinery- gate prices [RGP]. RGP is taken as import parity price [IPP] and export parity price [EPP] in the ratio of 80:20. Since, import of petrol and diesel attract higher customs duty @ 2.5% against ‘nil’ on import of crude, PSUs get a fortuitous gain in pricing to the extent product is sourced from their own refineries. The gain is boosted by freight, insurance and port charges which are included in the IPP but, not incurred as petrol/diesel is not imported.
Furthermore, since customs duty is an ‘ad valorem’ rate or a percentage of the basic value, in a scenario of increase in the import price in dollar terms and rupee depreciation, the oil PSUs add to their windfall. This puts private firms sourcing supplies from imports to disadvantage [even where, the firm has its own refinery (e.g. RIL), it is required to surrender all of its LPG to PSUs who sell it to the beneficiaries under the subsidized scheme].
With so many fetters, it is but natural that even oil and gas majors who meet the existing eligibility criteria have not shown much interest in retailing. Therefore, it is unlikely that further relaxation in the investment/net-worth criteria alone would help. Private participation on the desired scale will be possible only when the government carries out wholesome reform in the sector.
This should include hiving off the infrastructure to an independent entity accessible to all players on ‘common carrier’ principle in an ‘equitable’ and ‘non-discriminatory’ manner. The subsidy on LPG and kerosene should be given directly to the beneficiaries bypassing PSUs. The existing controlled pricing mechanism should go even as the government should have no role whatsoever in pricing [including oral instructions].
The government may also consider enabling even small traders to sell these products which will serve rural areas better and help the employment objective too.