Is muscle memory good enough for Indian Oil & Gas woes?
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The Hydrocarbon Sector has always been far more volatile that the products it routinely handles. It’s said, more than four thousand years ago, natural asphalt was used in the construction of walls and towers of Babylon, since then, life has not been the same for humans. Hydrocarbons became the main provider of energy in the 20th century, gradually forming an inseparable and critical part of a nation’s economy. Countries constantly fought over it with disconcerting consequences. The current Russia – Ukraine war is but a fresh instalment in the saga. Most nations have mastered the fine art of no- political manoeuvrings essential for meeting the incessant energy needs of its people. Like most things in life, hydrocarbon largesse is not equally distributed. And the haves like to guard it zealously from the have not’s. Unfortunately, nature seems to have given India a pass by, in respect of this bounty; NELP, HELP etc. notwithstanding. Consequently, India imports almost 85% of its hydrocarbon requirements.
India having had a bitter sweet experience with foreign Oil majors operating in India, from well before the nation’s independence, chose to nationalise them, in the Mid Seventies. By the Nineties, when the liberalisation bug hit many nations, India once again allowed Private Operators into the hydrocarbon sector. The Oil PSUs, in the meantime, having reached commanding heights were serving the nation quite well. After overcoming many tribulations, these companies managed to get a fairly reasonable hang of the hydrocarbon business. Adept at handling international markets, they were respected for being fair in dealings and what they, as government companies, brought to the table. With rapid economic growth, India raced to become one of the largest consumers of Crude & Gas. It became adept at extracting advantage on purchasing on a long-term basis as also spot purchases, in emergencies. For a while, the biggest refiner IOCL became the sole canalising agent for crude purchases and developed market clout of its own. At one point in time, it was rumoured to have had a better credit rating with lenders than the Government of India.
In the meanwhile, the world economy was opening up. Globalization led to the development of thought that India should also aspire for large-scale companies which have a presence in the entire hydrocarbon value chain. One of the most prominent advocates of this theory was the Late Mr. Subir Raha, Chairman, ONGC. It did make sense since the scale is important for most enterprises giving them a distinct competitive advantage. However, obvious differences among policymakers saw such innovative ideas for PSUs being shelved. Remember, those were times when the private sector was making sizeable investments in Hydrocarbon and saw Oil PSUs as a challenge. They were keen on entering, big time, into what they thought was the most lucrative of businesses. Alas, there seemed to be some serious flaws in their initial approach. Unable to make the kind of profits they were looking for, clamour for, so-called, the level playing field was resorted to. A carefully crafted strategy and systematic lobbying saw concessions come their way at the cost of the existing Oil & Gas PSUs.
These were hectic times, on one hand, the Oil PSUs were gearing up for the massive competition and undertook measures – Technical ( more PSU Refineries could now handle sweet and sour crudes, De Bottlenecking to improve GRMs, Crack Spreads), S&D( Increased Tankage, More & Better ROs), Transportation changes (Strategic Pipelines, Change from carrying Products to Crude, Reverse Pumping). The Private players who had expected the Oil & Gas Business to be a cakewalk found themselves now pitched against two serious impediments to their successes and possible monopoly. The first was the pricing of petroleum products for sale in India and the second the lack of trunk pipelines. Overcoming these were not an easy task. Thus, the two-pronged strategy was adopted to tackle the lack of transport infrastructure. One was going for a sustained campaign against the so-called advantages enjoyed by Oil PSUs had and the second trying to utilize existing facilities of Oil PSUs or neutralise them (especially the Pipelines). This was to thwart any legitimate competitive advantage that the Oil PSUs had build up through sustained efforts over long periods of time. In doing what they did, Oil PSUs were also creating invaluable national assets which ultimately belonged to the people of India. Being first movers and having spent considerable capital, the Oil PSUs were in the process of generating vital national properties which was so essential for the energy security of India. policies and bodies like PNGRB were set up by the government to put check on Oil PSUs putting up facilities based on business interests alone.The pricing issue was carefully and strategically sidestepped by getting concessions to export most of the products produced in India by Private Oil & Gas companies in world markets. While the private companies could get considerable profits through this route, the Oil PSUs were bereft since they were obligated to sell primarily in India. Persistent and astute hard selling by private players resulted in the game tilting in favour of the Private Oil & Gas Companies and stymieing the growth of Oil PSUs.
In the meanwhile, Neo economists, privatologists and babus; apologists all, been influenced by World Bank beliefs and western capitalist models started a persistent campaign of total privatisation of the hydrocarbon sector. It’s a separate issue that despite much spending, publicity and chest-thumping not a single Oil & Gas PSU sale could find a suitor. The hand of god prevented the sale/ takeover of a large, well-managed and profitable PSU Oil major being acquired by private players but is the nation out of the privatization clouds? Surely not! Enthrallingly, it has taken, but one Russia – Ukraine war, to bring forth the frailty of contemporary, Indian hydrocarbon policy. The general public is still shielded from the stark and brutal reality of the hydrocarbon sector. The potential economic havoc; rampant and total privatization brings has been witnessed in many nations. Still, India seems to be cussedly persisting with it for minor immediate gains. Sure, one can take all this as rhetorical but the last quarterly results of most Oil & Gas Companies brings forth startling facts which will require more than a pinch of salt to digest.
Big Oil Companies of the world have made close to $ 100 Billion in the last quarter. Aramco posted a Profit of $ 48.2 Billion, BP Reported a Profit of $ 9.3 Billion, TotalEnergies made a Net Income of $ 5.7 Billion, ExxonMobil estimated second-quarter 2022 earnings are $17.9 Billion and Roseneft’s Net Profit was $ 3.2 Billion. Closer home, in the First Quarter (April to June; ONGC made a Net Profit of Rs.15,206 Crore, (Approx. $ 1.90 Billion @XCR 28/8), OIL made a Net Profit of Rs 1,555.46 Crore (Approx. $ .194 Billion), for the April-June quarter GAIL saw its net profit jump to Rs ₹2,915 Crore (Approx $ .364 Billion) while Reliance Industries Oil & Gas Sector reportedly had a Profit of Rs 103,212 Crore ( Approx $ 12 Billion) in Q1 FY22 and Nayara Energy had a Net profit of Rs 3,563.7 Crore (Approx. $ .445 Billion). Yes, most would say war (even a distant one) is good for business. Pray, why then, contrary to the trend all over the world, the Big (Bad ?) Indian Oil PSUs- IOC, HPC & BPC, reported a collective loss of Rs 18,480 Crore (Approx $ 2.310 Billion) in Q1 FY 22-23. True, these Oil PSU majors are predominantly operating in mid and downstream sectors but are the losses caused by market forces? No, we all know that Oil Pricing in India is still firmly controlled and utilized as a tool of governance by the government. Most would agree that for a developing country like India controlling the prices of Oil & Gas products is a necessary evil and could be mandatory to tackle runaway inflation. But why always make the Govt. owned Oil & Gas Companies pay the price? Why should their day-to-day business be a tightrope walk? Where is the level playing field now? To add salt to the wound, cheaper crude, which the Government of India managed to obtain through enormous diplomatic efforts, at the cost of earning the wrath of the USA, Europe and several other countries was cornered by private players in India to make extravagant gains. The worst part is that all this is done at the cost of the common man. Consumers in India had the mortification of facing dry petrol pumps and non-availability of gas at outlets. The Government was forced to issue orders under Universal Service Obligation (USO) to maintain Petrol & Diesel Sales at Pumps. Private fuel retailers like Jio-bp, Nayara Energy etc. either raised prices at some Pumps or curtailed Sales. Why are Private players allowed to take advantage of tragic circumstances of war and make humongous profits while Govt? PSUs are solely made to carry the burden of the common man? Even windfall taxes levied, which anyway were too little too late, got rolled back upon orchestrated tear-jerking by interest groups. In the entire bargain, it’s the hapless Indian consumer who was left high and dry.
The monopoly of any kind have distinct disadvantages, especially for developing nations. Asian and South East Nations have time and again proved (with some exceptions of course) that by and large their economies are susceptible to external economic & political challenges. Their economic systems have yet to reach the stage of maturity where they can afford monopolies or oligopolies. True competition does not mean the total and complete annihilation of Public Business Enterprises in such countries. Their Governments unfortunately cannot shrug away from certain considered business activities and restrict themselves to municipal activities alone. To cite some examples, South Korea, like India, imports most of its Oil & Gas requirements and Government enterprises dominate the sector, Malaysia, an OPEC country, has a sizeable Government owned Oil Company, Indonesia which used to export Oil and is now a net importer has a Government owned Oil Firm. Similarly Saudi Arabia, Russia, China, Iran, Kuwait, Venezuela, Nigeria,Thailand all have Government owned Oil Companies. So, many common Indians have started asking this question; why Indian Government has taken a vow to exit all Oil & Gas Companies? With hostile neighbors and internal conflagrations, is it safe to go whole hog of privatization in this important and strategic sector? What is the true prognosis of the Health, Education, Transport, Fertilizers and Banking ( to some extent) Sectors where are now predominantly not in Government hands? Let us not deceive ourselves in believing that Oil & Gas is the same as Telecom Sector. Even if we are to assume that the Private Oil Companies become really big, world class players would they still be able to negotiate with foreign Governments or Big Oil Majors in dire circumstances to obtain Crude and Natural Gas at competitive rates? And even if they do, will they want to sell it to their fellow citizens at modest profits? The lure of top dollars is not easy to resist. Latest events like war in far away Europe (which did not even remotely involve India), have revealed that Private Oil & Gas Companies in India are not free from the temptation of profiteering in times of crisis, at the cost of the common man. PSU Oil Companies have the advantage of the implicit sovereign backing which is advantageous during crisis situations. They are amenable to government directives and fulfill many social obligations. A solid regulatory framework is a national requirement for full scale privatization to be workable. USO or Windfall Taxes are knee jerk reactions and a mere slap in the wrist on the profiteers. Government needs to put in place a more robust system than imposing windfall taxes once the horse has bolted the stable. Babus and sundry Government advisory bodies instead of blaming the proverbial foreign hand for failed experiments, should concentrate on making a more stringent and powerful regulatory mechanism. Policy makers cannot resort to muscle memory for a vision beyond. The concern should be for a more egalitarian energy policy. The war has shown that energy sovereignty is as important as national sovereignty. The much battered hydrocarbon consumer of India has till now, shown a lot of resilience; it’s solemn plea seems to be please don’t take away the safety valve of Oil PSUs. Time and time again Oil PSUs have come to the rescue of the common Indian consumer. Advisors and Policy Makers have to get off their high stools and consider, if nothing more, a more collaborative Oil & Gas Sector. If Private Monopolies have a free run, a manipulative and exploitive system may set in. Let the recent rachmanism like act be an AWS for course correction. By-Sidhartha Mukherjee