The Pool’s Drying Up

FISCAL 1996-97 may turn out to be the worst year ever for the petroleum industry, barring the 1991 Gulf War period which led to the severest crisis in balance of payments. Rising global crude prices and a sharp drop in domestic production will ensure that imports reach a record level of $9.5 billion (Rs 33,250 crore) this year, the oil pool deficit with importing companies balloons to Rs 15,500 crore and the subsidy on kerosene, LPG and diesel touches a staggering Rs 18,000 crore.

Forcing the Government to admit to an extremely difficult situation at the Economic Editors’ Conference in the capital on November 5-7. Ruling out a price hike, Minister of State for Petroleum T.R. Balu helplessly disclosed: "We have sent the proposals. It’s the collective responsibility of the Union Cabinet to react to the situation." Not ruling out a price hike, Finance Minister P. Chidambaram bravely assured: "We have to go into the question of drop in crude output, which is one of the main reasons for a lower index of industrial production this year. We are examining various options to contain the oil pool deficit." 

This entire summer, the Petroleum Ministry has been sending missives to the Cabinet on the oil pool account. It had also warned against a forced demand management, or rationing, if all options failed. Senior officials admit that a second price hike, though desirable, is a highly difficult task for a multi-party government. A better option would be to deregulate the sector as per the report by the R-group, the Petroleum Ministry’s Reform Committee. Says Balu: "There is a need to change the present fiscal regime and rationalise subsidies and price structure. Market regulation and privatisation need to be taken up in a planned and time-bound manner." Adds Dr A. Bhattacharya, economic adviser in the ministry: "The best solution is deregulation and setting the market forces in motion. The second-best solution is to raise prices. And if both fail, oil companies would have to borrow from the market." With short-term interest rates ruling high, that sounds like a choice between the devil and the deep sea.

Balu listed four reasons for the massive jump in the oil pool deficit to Rs 15,500 crore from Rs 13,600 crore forecast in September: "Depreciation of rupee value, increase in imports, rise in world crude prices and non-adjustment of selling prices to the required extent." True, due to the political tension in West Asia, global crude prices have risen from $18.3 a barrel during July to $22-23 now. Even if prices sta-bilise around this level, as Bhattacharya expects, imports would cost $2 billion more than last year’s $7.5 billion, with volume imports going up to 33.2 million tonnes (mt) from 27.2 mt. And, with the July oil price hike being only a partly successful exercise, the subsidy will swell to Rs 18,000 crore, from Rs 9,800 crore in July. According to Balu, this includes a subsidy of Rs 8,000 crore for diesel, Rs 6,000 crore for kerosene and Rs 2,000 crore on LPG.

But the area which the ministry has chosen to gloss over officially is the alarming drop in domestic crude output, which has pushed up the import bill by another Rs 2,800 crore. Instead of going up to 36.31 mt from 35.2 mt last year, crude output is set to decline to under 33.72 mt this year, thanks to underperformance by ONGC’s Bombay High and Neelam oilfields. While Bhattacharya thinks there is no great trouble with Bombay High and it will hold good for another 20 to 25 years, there’s a strong difference of opinion in the ministry about ONGC’s technological and management capabilities.

Politically undecided on a price hike, the Government did its paltry bit on Thursday, November 7, by setting up a committee under geologist K. Narayanan to go into the underperformance of the Western offshore and urging consultative committee members to give suggestions to contain the deficit and prevent disruption in supply of diesel and kerosene. Says consultative committee member Dipankar Mukhopadhyay:

 "The Government’s own policy is inconsistent insofar as it encourages use of diesel in power plants and other areas. We are yet to come out with a mandatory energy audit, a must for energy-deficient countries like us. For the last five years, we are trying to reach the elusive target of 35 mt, and yet we don’t have a comprehensive exploration policy." The news, clearly, is of unrelieved gloom.