Opinion An era of consequences

The malaise of the power sector is well known. Multiple committees have written reports and detailed the steps required to redress the situation. The price structure has to be rationalised; the state electricity boards must be put back on their financial feet; the transmission and distribution network should be privatised (at least in part); theft must be contained; corruption and the coal mafia should be stamped out,etc. These recommendations have been accepted in principle,but they have not been fully implemented. As a result,the sector has stumbled from one crisis to another building up to the embarrassment of last week.

Can we hope that the disaster will concentrate the minds of decision-makers? Who knows,but what is clear is that last week’s power shutdown may not be an isolated one-off for the energy sector. A crisis of comparable magnitude could hit the petroleum sector too if government continues to procrastinate over pricing policy.

It is now well documented that the oil marketing companies (OMCs) — IOC,BPC and HPCL — “underrecover” approximately Rs 13 and Rs 27 for every litre of diesel and kerosene and Rs 230 for each cylinder of domestic LPG that they retail. Less well known is the fact that in FY 2011-12,the exploration and production companies,ONGC/ OIL,received only $55 for every barrel of crude oil sold to the OMCs. The international price averaged $117 per barrel. The consequential impact of this “administered” pricing has been to push the OMCs to the financial edge; they have had to ratchet up their bank borrowings — last year it touched Rs 130,000 crore — and cut back on essential investments in new projects,maintenance and R&D. It could force them to default on their payment obligations if cash losses continue to mount. Supplies would then get disrupted and product shortages would appear at the retail forecourt. As for ONGC/ OIL,they have had to scale back their domestic exploration efforts and their competitiveness in the international market for new acreage has been weakened. Their reserves might also get wiped out in two years.

I am sure the government will not allow its petroleum companies to go under. But as we have seen in the case of Air India and now in last week’s disaster,no sector is sacrosanct. Policy procrastination can so weaken foundations that an inadvertent regulatory lapse,an informational glitch accident,or just human error can bring down the superstructure of the most strategic maharatnas.We need to remind ourselves of the three verities of the energy sector. One,it is capital and technology intensive. Two,it takes long to change direction. And three,it cannot be divorced from politics. Energy policy must,therefore,be formulated through a long-focus,technology-tinted and politically nuanced eye glass.

This requires the adoption of a two-pronged approach. One prong should be focused on mitigating the “avoidable” costs of short-term populism. The other should be looking to build the foundations for longer-term sustainability. The objective should be to eventually have both converge. Let me illustrate such an approach with an example from the petroleum sector.

The government does not have the “coalition” mandate,or perhaps the political will,to align petroleum prices to the market. The government cannot,however,allow the petroleum companies to fall off the edge. The short-term prong of policy should look to shifting the subsidy burden from the companies’ balance sheet onto the government’s. Subsidies should be paid directly from the budget through direct cash transfers and/ or a stamp card. The finance minister will no doubt face parliamentary brickbats for deepening the fiscal deficit but were diesel and kerosene supplies disrupted,the public onslaught could be even more painful. The longer prong should push to substitute Liquefied Natural Gas (LNG) for diesel in long-haul transportation. This is because diesel accounts for the bulk of the subsidy outgo and truckers are amongst the largest consumers of diesel. Compressed Natural Gas (CNG) is already retailed in several cities. But CNG cannot be used for long-distance trucks because it has only 20 per cent of the energy content of diesel. LNG,on the other hand,is 2.5 times denser than CNG.

There will of course be costs. The truck engines will have to be modified and an LNG retail network created. But the benefits could be significant. First,given that the trade parity price of diesel is about $19 per million British thermal units (mmbtu) and that of LNG $11 per mmbtu,there would be an $8 per mmbtu fuel-cost saving were LNG substituted for diesel today. Second,gas is a cleaner fuel than diesel. Third,the subsidy outgo would reduce and this would narrow the fiscal deficit.

The message is simple: if we want to avoid a repeat of the disaster of last week,short- and long-term solutions must be actioned,politics must no longer be the excuse for policy procrastination and the Churchillian warning should be taken to heart.

The writer is chairman of Shell companies in India. Views are personal