The Hindu Business Line : 'Oil PSUs must pool their resources'

THE Chairman of the Indian Oil Corporation Ltd (IOC), Mr M.S. Ramachandran, has stressed the need to restructure oil companies in the public sector with a view to pooling in their combined resources before taking on competition from giants in the private sector.

Speaking to newspersons, Mr Ramachandran said there was no need for public sector oil companies to fight a fratricidal war. Instead, it would be in their collective interests to combine their resources and domain expertise and face competition from formidable players such as Reliance.

While in the Administered Price Mechanism era, the oil companies were assured of returns on a cost-plus basis, the scenario was quite different now. "Nationalisation of oil companies should have been followed by restructuring. There was the cost-plus dispensation. Then, the post-tax returns on the depreciated value of net fixed assets resulted in oil companies investing recklessly, thereby leading to duplication," he said, adding that various global models could be looked up before the restructuring process was initiated.

According to him, while there was a need to restructure, companies' aspiration to grow must be protected without destroying value. Restructuring should also aim at tapping the fullest potential of the companies with a view to ensuring growth and profitability in the long term.

IOC, he said, has had to put up with an under-recovery of Rs 1,800 crore in the first quarter of the current fiscal. This figure was expected to go up to Rs 3,055 crore by August 15 this year, assuming that there will be no cross subsidy with effect from July 1.

The galloping crude prices were impacting the bottomlines of oil companies and the price band had already been breached with respect to diesel prices.

"The price band system is good, but ever since it was announced oil prices have been moving in one direction," he said and presented a strong case for a "correction mechanism". In this context, he urged for a reduction in the ad valorem duty structure on the lines of the Malaysian model where prices are maintained in reference to the duty structure. A specific rate of duty in place of ad valorem duty, too, would be welcome.

Mr Ramachandran said that while the profits of upstream companies were driven by overseas prices, the downstream companies' profits accrued from the difference between the crude price and the price of the final product. For IOC, however, besides this, a substantial portion of the profits was on account of increased productivity. In the first quarter of 2004-05, the refining volumes had gone up by 21 per cent compared with the corresponding period of last year.