Oil: slippery like hell on the ATF front

By R.N.Bhaskar

July 2007 (published in the DNA).

The government’s unwillingness to dismantle the APM has resulted in an absurd situation where private oil and gas companies are compelled to export their products, even while India continues to import similar products. Wouldn’t it have been easier for these companies to supply kerosene, diesel, naphtha and gas to Indian markets at administered prices? But that would allow private companies to profit at the government’s expense.

Some believe that there is a market price of gas – which is not really true because most prices the world over are negotiated prices, as this product is very thinly traded. That was the reason why many objected to the fuel supply contract of the now defunct Enron, as it controlled the supply of LNG worldwide.

Can the government dismantle the price control mechanisms in the oil sector considering that they have allowed unfair profits to be made through the continuing diversion of naphtha to adulterate diesel, and the inevitable diversion of diesel and kerosene to sectors which weren’t supposed to benefit from these ‘administered’ prices.

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The oil and natural gas industry in India is going through extremely turbulent times. At risk is the entire Administrative Price Mechanism (APM) of the government, and the large amounts of ill-gotten gains that many people make thanks to the distortions created by the APM.

One contributor to the turbulence is the announcement by Royal Dutch Shell that it is willing to market Aviation Turbine Fuel (ATF) at Indian airports at prices that are discounted to prevailing market prices. This could change the way the government of India procures and supplies ATF.

Hitherto, government-owned oil companies have monopolized all ATF imports and sales. The Royal Dutch Shell announcement increases the pressure on the government to allow private players to supply ATF at Indian airports. ONGC, Reliance Industries and the Essar Group have already been clamouring for similar rights.

The government knows that its ATF import bill is bound to soar even further considering that India has just managed to conclude deals expanding its fleet of aircraft. India’s domestic fleet of aircraft in India is likely to double from 259 to 611, while its international fleet is likely to increase by three times from 47 to 179 (please see table). Hence the need to revise its policy on ATF supply,

There is another problem with the government’s APM which has allowed it to supply kerosene, diesel, naphtha and gas at administered (read discounted) prices to needy sections of India. The APM-governed supply of kerosene is meant for poor people, while naphtha and gas goes to sponge iron and fertilizer units. Diesel under the APM is meant for vehicles and the railways, but not for use by privately owned diesel gensets.

Private players like Reliance and Essar want to supply kerosene, diesel, naphtha and gas to the very same constituencies, but the government does not know how to do this without reimbursing them the amount of ”assumed” subsidy. This has resulted in an absurd situation where these companies are compelled to export such products, even while India continues to import similar products. Wouldn’t it have been easier for these companies to supply kerosene, diesel, naphtha and gas to Indian markets at administered prices? But that would allow private companies to profit at the government’s expense. Or it would require dismantling the price control mechanisms that have allowed unfair profits to be made through the continuing diversion of naphtha to adulterate diesel, and the inevitable diversion of diesel and kerosene to sectors which weren’t supposed to benefit from these ‘administered’ prices.

Now there is a third headache. Spurred on by the fight between the Ambani brothers, the Andhra Pradesh state government has asked the government to finalise the price of gas supplied by private players to sponge iron and fertiliser units. On the one hand, there is a claim that there is a market price of gas – which is not really true because most prices the world over are negotiated prices, as this product is very thinly traded. That was the reason why many objected to the fuel supply contract of the now defunct Enron, as it controlled the supply of LNG worldwide. On the other is the demand for a fair price that would allow fertilizer and sponge iron units to remain commercially viable. The indecision has resulted in the gas remaining unutilized, because unlike oil products that can be exported, it is difficult to export gas, and also because there is no international benchmark price for this gas.

The last crisis has compelled everyone in the government to sit up. Something has to give way. Either the government agrees to purchase the private companies’ produce at a negotiated price (which will affect their financial operations), or it will have to allow them to make profits at the cost to the exchequer. Or it will have to abandon the APM altogether. Whatever the decision, do expect a lot more turbulence ahead.