The Hindu Business Line : Transport conundrum, post-APM

Right now, there are two nodal agents for crude imports — IOC, which acts on behalf of the oil companies, and SCI, which transports the crude. SCI is only required to negotiate with IOC. For the import of petroleum products, Indian flag carriers, including the SCI, get purchase preference over foreign flags. It is not yet clear if the same preferential arrangement will continue after April 2002, post-APM.

WITH less than three months to go before the proposed dismantling of the administered pricing mechanism (APM) for the oil sector, several questions remain unanswered, the most important being who will bear the burden of the transport subsidy now being taken care of by the Oil Coordination Committee.

Reports have it that the transport subsidy, running into thousands of crores of rupees, may be allowed to continue for the North-Eastern region. If that happens, there is no reason for other regions not to stake a similar claim. For instance, the hills of Uttar Pradesh or the backward regions of Orissa and Madhya Pradesh. If the subsidy is extended to one region, it is almost certain that other regions too will ask for the same.

If the APM is dismantled and the OCC wound up, then the subsidy burden could be borne either as budgetary support, or absorbed by the oil companies or the consumers may be made to pay for it. The shape of things to come is not clear. The Government has announced that the 15 per cent subsidy on LPG and 30 per cent on kerosene will continue with the indication that budgetary support will be provided for it.

The excise duty issue is another grey area. There are reports that there will be differential excise duty. In fact, the duty structure covering both import and excise duties will be critical to influence the decision on the APM. After all, the deregulation of the petroleum sector, of which the proposed APM dismantling is a part, presupposes the lowering of the duties. However, the issue of government revenue from these cannot be ignored.

Clearly, the Government is in a fix. This is evident from Friday's announcement on the hike in excise, entailing at the same time a lowering of prices at the retail level. The Government is borrowing from the oil companies to reduce its huge projected fiscal deficit and the arrangement will continue till the end of this fiscal. Will the Government really allow such a situation to develop where the oil sector ceases to be a milch cow? One, therefore, has the feeling that the future of the proposed dismantling of the APM is uncertain. It is not clear yet what form it will take. Indications are that the proposed dismantling may not be total. It can at best be partial.

Storage is another area that deserves attention in this connection. Since the public sector oil companies are now assured of 12 per cent post-tax return on investment, they keep setting up depots. What will be the scene like under the new dispensation is anybody's guess. The public sector oil companies have prepared a perspective plan, between 10 and 20 years, indicating the kind of storage capacity each will build in the next decade or so. In the post-APM situation, the projections might change altogether, more so because the present storage capacity for total petroleum products in the country is estimated to be larger than the marketing requirement.

Earlier, being backed by a refinery was a big advantage for an oil company. No longer. It will be still less so in the post-APM scenario. In fact, in a glut situation — like the one the country is witnessing now — an oil company without a refinery is in a more advantageous position than the one with a refinery. Those with refineries are desperate to sell their products. Thus, the desperation will only increase in the post-APM scenario. No wonder then that even a private sector petroleum giant now strongly favours the continuation of the APM. After all, the APM provides a certain amount of stability, something desirable for all concerned.

A free-for-all-situation, where each company is engaged in cut-throat competition, is not welcome. The ongoing tussle between IOC and RPL is a case in point. The construction of a pipeline network across the country was once considered vital for the transportation of petroleum products, especially as the operation cost is low though the initial investment is high. With uncertainty shrouding the fate of IOC's proposed refineries at Paradip and Bhatinda, the fate of proposals to lay more product pipelines will become even more uncertain.

The four state-owned oil companies have already come to an understanding that they will continue with their product-sharing arrangements for the next couple of years, even after the dismantling of the APM. The arrangement will also be in force with respect to IBP, which is up for disinvestment. However, the terms and agreement of product-sharing, to be decided bilaterally, are yet to be finalised. Finally, the import of crude too is slated for a change, post-APM. Thus, the Shipping Ministry, at the insistence of the Shipping Corporation of India, has urged the Petroleum Ministry to continue according the nodal agency status to the public sector shipping company in the matter of crude imports. If the Petroleum Ministry accedes to this request, then the SCI will be required to negotiate with all the oil companies which, on dismantling of the APM, will be free to import their own crude requirements without going through IOC.

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