• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Our Bureau

NEW DELHI, Sept. 13

THE Ministry of Petroleum & Natural Gas is actively considering a proposal to deregulate the business of setting up petro product pipelines, according to official sources.

Currently, new pipelines can be set up only after the board of Petronet India Ltd (PIL) approves the project and the company holds a minimum 26 per cent equity stake in the new venture.

PIL is a holding company in which 50 per cent of the equity stake is jointly held by Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL).

The balance equity is held by private sector companies such as Essar Oil Ltd (10 per cent), Reliance Petroleum Ltd (10 per cent) and other investors.

As per the Petroleum Ministry's proposal, if a company wants to set up a new pipeline between two destinations that are already connected by a pipeline, it will be allowed to do so.

The project will not require the PIL board's clearance. It will also not have any stake in this project.

The pipeline's tariffs will be capped by the proposed regulator.

If the proposal goes through, companies such as Reliance Petroleum Ltd (RPL) will benefit, since it has already sought permission from the Government to set up five pipelines for moving products from its 27-million tonne refinery to various parts of the country.

These include a pipeline connecting Jamnagar to Delhi, Goa to Hyderabad through Sholapur, Delhi to Patiala and one connecting Chennai to Bangalore.

According to officials, the single-door PIL route for setting up pipelines was relevant in the Administered Pricing Mechanism (APM) era that was disbanded in April this year.

Under the APM, marketing of petro products was undertaken only by public sector oil companies and pipeline transportation charges were paid for on a cost-plus basis and equalised.

Hence, less economical pipelines (owing to lower volume traffic or demand) were cross-subsidised by pipelines enjoying better economies.

Hence, once the asset was created, it was serviced by the oil pool account administered by the Government.

In the post-APM phase, where private players have been allowed to market petro products, the PIL model has run into problems on grounds of ownership.

Several oil companies have told the Government that they are keen to have complete control of the pipeline rather than simply gain access to it.

For instance, Petronet CTM Ltd, where IOC is the lead sponsor, is delayed as Petronet is reviewing the financial viability of the pipeline that will evacuate products from Chennai Petroleum Corporation Ltd's (CPCL) refinery to Madurai.

While IOC, which owns CPCL, is convinced about the viability of the project, the Petronet board is reviewing the project.

In such cases, the pipeline promoters can go ahead without PIL in the proposed deregulated scenario.

The upside of the Petronet model, however, is that it serves as a quasi-regulator in the sense that it will regulate and ensure that only efficient and optimal investment enters the sector.

This is relevant, since according to McKinsey, hired to advise the Government on this issue, the industry is better capable of assessing the optimal investment requirement than a regulator.

Product pipelines are not a natural monopoly, since it competes with railways and trucks, and hence, investment monitoring is not required.

In the case of gas transportation, the Government is toying with the idea of making Gas Authority of India Ltd (GAIL) the `Petronet equivalent' in the gas sector since gas transportation is a natural monopoly.

This would mean that in case any company plans to set up a pipeline to transport gas, the pipeline project would require to be approved by the board of GAIL, following which the latter would hold a minimum 26 per cent stake in the pipeline project.

Send this article to Friends by E-Mail

Stories in this Section
Young Achievers Award

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line