Oil sector reforms go for a toss

So when the PSUs made a representation to ministry officials over the last six weeks, it was agreed in principle that, at least for the time being, the PSUs would not be fully exposed to the vagaries of the market.

A unique formula was then evolved. ONGC, for example, is to be paid either on the basis of the global price, or the existing price which assures it a fixed return oninvestment, whichever is higher. That’s right, whichever is higher! ONGC, for example, gets paid $12.5 per barrel of crude, but when global prices were at an all-time low a week ago, it would have been paid less than this. Normally, being exposed to this sort of competition is what will force companies to get more efficient — they cut costs in a downturn and reap benefits during an upturn. To take the case of ONGC, a sharp fall would force them to be more cost-effective in their operations, to complete projects on time, and to ensure that none of the fields they’re working on get damaged. But with the ministry’s new proposal, ONGC, or any of the refining companies, for that matter, needn’t worry about becoming more efficient in a hurry. That, incidentally, was one of the avowed aims of the oil sector reforms.

Talk to ministry officials and you’ll be told that the main reason is that global prices have fallen so dramatically that, if the oil companies were to be paid global prices, they would be wiped out.And since that cannot be allowed, they have to be given some protection, at least for the time being.

The point, however, is that most experts believe that the current downturn could last for close to two years. The crash in south-east Asian currencies, apart from the excess of refining capacity the world over, will ensure this. Does that mean that the PSUs will be protected for the entire period? Or will protection be enforced at times, and relaxed during others?

Besides, if these units are to be protected, at whose cost will this be? Either it means that the oil pool deficit will increase, or the consumers will not get the benefits of the lower global prices.

Another issue, to which little attention has been paid, and which is likely to plague the beleagured oil reforms over the next few months, is that relating to ports and railways. Close to 65 percent of the revenue of the major ports, for example, comes from handling petroleum imports and 12 percent of railway revenue comes from petroleumtraffic. While both the ports and the railways (more the ports, actually) spend very little time or investment to handle this traffic, they’ve charged exhorbitant rates in the past. Very often, for example, the ports do not have powerful enough tugs to tow the ships. Since this causes delays, the oil companies hire more powerful tugs on their own and bill it to the oil pool account. The ports, however, continue to charge high rates. No one really objected in the past because this was charged to the oil pool account.

But now, with the government keen to stop this, it is certain that it will face huge pressures to allow the dispensation to continue. The argument, obviously, will be of how ports will be starved of funds which are essential if they are to make fresh investments. State governments, similarly, especially those in the south, have also got away with levying all manner of taxes on refining companies again, the oil pool took care of it all. The point is that with all manner of pressures being put onthe government, it seems difficult to see how the oil sector reforms can even proceed. To be fair to all the players including the oil companies, though, if the government is going to protect others, there’s no reason why they should be discriminated against.