Posted by: SATYASRINIVAS | March 28, 2007

India’s indigestible oil gulp

India must halt its frenzied acquisition of petroleum and gas from every part of the world and give priority to energy conservation and renewable sources, while strengthening the state oil sector.


Hundreds of cars jostle for space at an automobile factory in Chennai. The number of cars on Indian roads is fast increasing, one of the factors pushing up the country’s oil consumption. PETROLEUM Minister Mani Shankar Aiyar is indisputably among the ablest members of the Manmohan Singh Cabinet. Even his detractors would find it hard to question his sharp intelligence and wit, his integrity, his excellent grasp of complex subjects, and his high administrative competence, leave alone his remarkable eloquence and ability to articulate progressive ideas.

To a well-wisher and friend like me, who shares his passion for secularism and nuclear disarmament, these attributes appear all the more impressive. In some ways, the United Progressive Alliance is lucky that Mani Shankar Aiyar’s appointment to his portfolio coincides with a year-long period of unprecedentedly high international oil prices, which are now $55-plus a barrel (bbl).

There, precisely, lies the rub. High oil prices have confronted the Minister with a series of tough choices: How best to secure supplies of crude and gas even as their consumption rises by leaps and bounds? How to maximise India’s leverage in the highly competitive global market for petroleum and gas? How to achieve energy security as the domestic production of oil falters? How to accelerate hydrocarbon exploration and improve recovery from existing Indian fields? How to protect the bottom lines of India’s public sector superstars or Navratnas, the oil companies, while guarding the ordinary consumer and containing the inflationary impact of high crude prices? How to promote substitution of fossil fuels with bio-fuels like ethanol? In the larger context, how to promote the worthy cause – indeed, the environmental imperative – of energy conservation, while securing reliable energy supplies?

So complex and confusing are some of these options that it is hard to strike the right balance every time, or to avoid straying temporarily from the optimal course (even though that deviation might soon be corrected). Given the political constraints under which such decisions are made, some slippages and sub-optimal outcomes become almost inevitable. (Mani Shankar Aiyar would probably acknowledge this himself.)

At least three such slippages are noteworthy in the petroleum sector. It is in the public interest that these, and the issues they raise, are discussed dispassionately and frankly and in a constructive and friendly spirit. The three items pertain to the pricing of petroleum products and its impact on oil public sector undertakings (PSUs); creating a level playing field for these companies as the petroleum sector is opened up to private competition; and the urgent need, amidst India’s oil gluttony, to put out the message that our oil and gas consumption cannot be permitted to increase indefinitely; conservation and promotion of renewable energy is no longer an option: it is an absolute necessity.

The government has tried to cushion the impact of high oil prices in the international market, on which India depends for three-quarters of its consumption. It (hesitantly) raised the selling prices of petrol and diesel only once in the past five months. But the increase was inadequate to the extent of 30 per cent or more (depending on the product) in absorbing the impact of high world prices. Over the past year, world crude prices have risen by almost 80 per cent. But domestic petrol retail prices (Delhi) were raised by a mere 25 per cent and diesel prices by 38 per cent over the same period.

For us, what is more relevant than the international price of crude is the Indian Basket Price (IBP) which measures the weighted average cost of oil procured from different sources. Between March and December 2003 and the same interval last year, this rose from about $26 to $37 a barrel – a hefty 42 per cent rise. But the retail price of petrol rose by a meagre 16 per cent. Diesel prices were raised by 20 per cent – nowhere near the level necessary to absorb the full impact.

There has been no increase in petroleum product prices whatever since November 2004, although global IBPs have risen from $37 to $48-to-50 a barrel – by 30-35 per cent. If the government’s own import parity formula is followed, which links specific products to their prices in international markets, petrol prices should have risen by 39 per cent and diesel prices by a similar proportion. In India, petrol is priced 44 per cent higher than diesel. But in global markets, diesel rules higher ($61.62/bbl) than petrol ($58.39).

Our oil PSUs lose Rs.3-4 each time they sell a litre of diesel or petrol, and as much as Rs.82 when they sell a liquefied petroleum gas (LPG) cylinder. The loss is even higher (Rs.8 to 10 a litre) on kerosene, for selling which they get a subsidy of 81 paise. The government’s refusal to compensate them has inflicted a huge burden on the oil industry. This is unequally shared, hence doubly unfair.

Ever since the administered price mechanism (APM) for petroleum was dismantled, the entire worthy scheme of cross-subsidising some products (for instance, kerosene, consumed as cooking fuel by the poor) by others (for instance, petrol) broke down. Great imbalances and incongruities have emerged. Take, for instance, the misuse of kerosene. It is well known that traders adulterate diesel on a large scale with kerosene, if the price-differential between the two is 25 per cent or more.

Today, diesel costs about three times more than the price of kerosene sold through the public distribution system (PDS). This is an invitation to rampant adulteration, clandestine imports and other malpractices, which erode the oil PSUs’ profitability. But the scandal is not restricted to kerosene. As recent exposures show, it extends to petrol (adulterated with naphtha) and diesel too, and has a Rs.10,000-crore magnitude. The private culprits responsible for this have not been booked.

THE PSUs – comprising some of India’s technologically most advanced and well-managed corporations – are fettered in numerous ways. They have no flexibility in pricing their products and must follow the government’s stipulations strictly. By contrast, private oil companies, whose marketing activities are rather limited, can do as they wish. They are under no compulsion to sell a product if its cost to them is transitionally high. And they can make high profits by taking advantage of location, for instance, near ports or refineries. No wonder a huge proportion of their outlets are located on highways near the coast.

The oil PSUs have had to curtail their marketing plans. Worse, their ability to generate and plough back profits, and modernise and/or expand, has eroded. The full impact of the abolition of the Oil Pool Account and APM, now being felt, has proved extremely negative and discriminatory. Other past decisions by the government as regards the choice and scale of technology in, for example, refining, have hamstrung PSUs vis-a-vis private companies such as Reliance Petrochemicals (which has a 30 million tonne unit at Jamnagar). As a result, Reliance’s refinery margins are $3-4/bbl higher than the PSUs’, and manpower requirements at least an order of magnitude lower.

The absence of any effort to level the playing field is likely to be felt in marketing operations too. So far, three private companies (Reliance, Essar and Shell) have entered retail marketing. (There are two new PSU entrants too, including Oil and Natural Gas Corporation-Mangalore Refinery and Petrochemicals Limited.)

Unlike PSUs, the private firms are under no obligation to allot petrol pumps to specific categories of people through a complicated process, along with reservations, and so on. More important, they only have to allot a small proportion of their operations to remote or backward areas. The PSUs must strictly follow government-dictated prices, but private companies are free to vary prices according to demand and lure dealers and customers with gifts such as cell phones or textiles and otherwise poach upon PSU networks.

The PSUs have to shoulder social responsibility such as regional dispersal of installations in the interest of balanced development, for which they are not even nominally compensated. (In taking delivery of oil at Haldia, instead of Jamnagar, they incur a freight disadvantage of 30 paise a litre.) If they were to follow the logic of profitability, the PSUs would shut down between a third and a half of their 30,000-odd retail outlets, especially in the northeastern region and hilly regions elsewhere, or in the backward districts of Jharkhand, Bihar, Uttar Pradesh or Assam, where there is very little demand. That would be grossly unfair to the people of these regions.

The only just solution to this is to impose an equivalent social obligation upon private oil companies, as in the aviation business, by creating several quotas for different kinds of regions/markets. Equally important, they must be made to follow non-predatory and ethical marketing practices.

This is not just an ideological proposition. It has immense practical import. If the oil PSUs are drained of profits, and their operations squeezed, they will become vulnerable to takeovers by private corporations. There could be no more brazen way of transferring priceless public property into private hands.

THE third cause of concern, indeed worry, is India’s frenetic activity to tie up oil and gas supplies through investment agreements, sale/purchase contracts and exploration-cum-production-sharing in each region of the world – without even a thought about limiting or discouraging skyrocketing consumption of oil. India has shown a voracious, indeed monstrous, appetite for oil and gas as it burns increasing volumes of them in cars, two-wheelers, and to generate the electricity on which television sets, air conditioners and other gadgets fuelling the consumer boom run.

IN 2004 alone, India’s oil consumption spurted by 11 per cent despite sky-high oil prices. India is now the world’s fourth biggest oil consumer, following U.S., China and Russia. It seems to be defining its oil “needs” in a bizarre, open-ended way, as if these were not socially and politically determined under elite influence.

India’s oil consumption, now about 2.25 million bbl/day, is estimated to rise, at present rates of expansion, to a huge 5 million bbl in five to seven years. This should make all environmentally conscious citizens sick with anxiety. There is no way that India can or should sustain such high levels of energy consumption without causing enormous and irreversible damage to the global environment.

Such elitist consumption mania should have no place in a halfway sane society. True, our energy consumption per capita is under one-sixth that of the U.S. But that is no argument for emulating the U.S. Rather, it constitutes a case for reducing energy consumption in the U.S.

Yet, India’s oil quest has been aggressive, even brash. Mani Shankar Aiyar has been holding roadshows in numerous countries and signing up contracts for equity investment outside the traditional sources of West Asia. Our oil companies are looking to Russia, Latin America, and African countries from Angola to Chad, Niger, Ghana and Congo, to Sudan. Other targets include Ecuador, Sri Lanka, Iraq and Venezuela. There is Myanmar of course; and above all, Iran with which a deal for a 2,600-km gas pipeline through Pakistan is likely to be signed. India has signed a $2 billion contract for a 20 per cent holding in Russia’s Sakhalin-I field. It wants to secure one million bbl/day from Russia alone.

India has emerged as China’s main rival in grabbing oil contracts in as many countries as possible – following a long trail of rising powers, including imperialist states. For many decades until the 1960s, countries such as the U.S., France and Japan used all kinds of methods to control oilfields and secure supplies. Britain divided up chunks of West Asia and created Kuwait to this end.

Reports The New York Times: “As Chinese and Indian companies venture into countries like Sudan, where risk-averse multinationals have hesitated to go, questions are being raised in the industry about whether state-owned companies are accurately judging the risks to their own investments, or whether they are just more willing to gamble with taxpayers’ money than multinationals are willing to gamble with shareholders’ investments.”

Such a debate must have top priority in India – in public forums, including Parliament, and among economists, energy planners, environmentalists and other concerned citizens. Several questions arise about some of the deals being made. For instance, it is far from clear that Russia will easily give up control over its oil. (See The Hindustan Times, February 15-17 series on this and Russian President Vladimir Putin’s agenda of centralising power through, among other things, control of oil.)

Although the Iran gas pipeline and deals with Venezuela’s progressive regime are welcome, many uncertainties surrounded other projects. A pipeline from Myanmar would have to pass through Bangladesh, with whom India has a tense, problematic relationship. The very magnitude of the investments being made – figures as high as $20-50 billion are mentioned – as well as the risks, makes a public debate mandatory.

Central to the debate we need are a range of issues: likely high prices of oil in the future – Goldman Sachs forecasts $105/bbl in a vertiginous repeat of the 1970s – the need to contain oil consumption for both financial and ecological reasons, and the need to explore alternative energy sources. Paying $50-plus/bbl for oil is profligacy enough. Paying twice as much would be insane.

Even more deplorable is India’s fast-rising contribution to global warming and depletion of the earth’s resources, two-thirds of which have already been degraded by human pressure, according to a new report by 1,360 scientists from 95 countries (see The Guardian, March 30). It should be a matter of acute embarrassment and shame, not pride, that India is emerging as the world’s third or fourth biggest polluter. It is another matter that thanks to its arcane politics, the Kyoto Protocol imposes no obligation on India or China to cut emissions.

We should know better. India and China will experience some of the worst consequences of global warming, including the melting of the Himalayan icecaps. There are disturbing reports that glaciers on the Tibetan plateau are receding at an average of 10 to 15 metres annually. They feed seven of Asia’s largest rivers – the Ganga, the Indus, the Brahmaputra, the Salween, the Mekong, the Yangtse and the Huang Ho. The result will be widespread flooding, followed by pervasive drought and probable famine.

It is imperative that we take corrective action now – by saving energy, by discouraging private transport, and by pricing petroleum right to discourage its profligate consumption. Above all, we must promote non-polluting, non-greenhouse gas-emitting renewable sources like wind power. Wind electricity generation in India has now come of age and become economically competitive.

Last year, we added an impressive 1,000 MW to our wind farms to take the total up to 3,000 MW – higher than nuclear power. This year too, the likely addition will be 1,000 MW. If the true environmental and social costs and benefits of different forms of energy are calculated, wind power emerges very close to the top, far superior to and cheaper than power generation based on fossil fuels.

We seriously need to promote renewable energy – as well as public or mass transport – through stiff, well-targeted levies on petroleum products and energy-intensive luxury goods such as cars and air conditioners. The alternative is unmitigated disaster


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