An oil policy less slippery

There is a view that the probable cause is manipulation by oil producers. An alternative, more widespread, explanation is that it is the consequence of speculation by Wall Street traders. Whatever the reason, the implication for the economy has been serious. The finance minister highlighted this in his kick-off speech to the annual CII-WEF India Summit Conference last week. He said India8217;s growth rate would have been at least a percentage point higher had prices reflected market fundamentals and had government not been compelled to extricate public-sector oil companies from the financial trough into which higher prices had pushed them.

The question that concerns me is: what will be government8217;s response to a similar situation in 2007? Clearly, if fundamentals are not driving the market, one should expect prices to yo-yo through next year again. The finance minister will surely not want to repeat at the next CII-WEF conclave that the oil sector has again denied India its economic potential.

Nor, I am sure, does anyone want our PSU marketing companies to face the uncertainties they have confronted this year 8212; first pushed into the red because government did not allow them to pass on the costs of imports to the consumer, then brought back from the brink with long-dated IOUs, and now, just as they are catching their breath, pushed to the edge again with the decision to reduce the retail price of diesel and gasoline, which will knock a gaping hole in their annual results.

So what should government do? My suggestion is that a formula be laid down, so that when prices rise above decreed limits, the burden will be shared by government which will lower taxes, companies which will cap profit margins, and consumers to whom a proportion of the price hike will be passed on.

Also, to help people understand the logic of such as system, there should be a readable primer on the economic, financial, social, and environmental consequences of the pricing subsidy. At least, the primer will raise the intellectual content of subsequent debates. The endeavour must be to bring back predictability to the corporate planning process.

A major plank of our energy-security policy is to intensify domestic exploration to harness our indigenous hydrocarbon reserves. Towards that end we have the annual New Exploration Licensing Policy NELP 8220;licensing8221; rounds. A global road show is undertaken to encourage international players. Round 6 of NELP has just been concluded and it is reported that as in the earlier five, the winning bidders are predominantly Indian companies. There are few, if any, new international entrants.

This is not, prima facie, a negative result. Reliance, GSPL and ONGC have in recent years notched up notable discoveries. But it is not the result government had hoped for. The question is whether the experience of six rounds contains lessons, which, applied in the seventh round, could attract greater international involvement.

The answer is indeterminate, given the diverse aspirations of the companies. But three messages should be internalised. One, most international companies have a good idea of the hydrocarbon potential of our sedimentary basins, so another global road show won8217;t add much value. Two, there is strong interest in Indian geology, but interest is bounded by the availability of exploration opportunities elsewhere and by the perception that evaluation criteria favour incumbent players, with companies feeling that insufficient weightage is given to international operational and technical expertise. Three, investor interest will heighten if government were to implement a system of 8220;open acreage8221;, allowing companies to delimit licence area and bid round the year.

The hydrocarbon market is intensely competitive. Many new players have entered the business. The national oil companies stride the industry like a colossus. In such an environment, there is value in size and vertical integration. It provides competitive leverage and a measure of protection against international oil market cycles.

A year ago, the government commissioned a study to review the structure of the Indian oil industry. The thought was that two vertically-integrated behemoths 8212; one, perhaps led by ONGC with BPCL-HPCL as its downstream subsidiaries, and the other by IOC with OIL and GAIL as subsidiaries, would have better chances of securing overseas assets against international competition.

The final report did not, however, endorse this view. Nor indeed did it recommend any structural reorganisation. It also left several questions unanswered. What should 8216;Hydrocarbon Inc8217; do to raise its competitive game? Can this be achieved without an overhaul? Can PSUs retain their separate legal and organisational identity but when required act in concert?

Here again, the answers are not straightforward, but it should be noted that the ministry of petroleum is the custodian of shareholder interests in PSUs. It has overriding influence over crucial management decisions. Why not, as a first step, formalise this situation by creating a supervisory board chaired by the petroleum minister or the secretary petroleum with the CMDs of PSUs as its members?

The board could be the paramount decision-making body. It could review plans, monitor performance, and ensure that the industry does indeed speak and bid with one voice and with the full support of the balance sheet of 8216;Hydrocarbon Inc.8217;

Ultimately, management must be freed from some shackles. Today they face multiple hierarchies 8212; their board, bureaucrats, the minister, Parliament, and of course, on the sidelines, vigilance officers and the CBI.

Success comes to those who can manage the consequent demands; it often eludes those who push the envelope. Policy tinkering that eases such pressure and encourages entrepreneurial management will have a disproportionately positive effect on performance and morale.

The writer is chairman of the Shell group of companies in India. Views are his own