Price Of Speculation

Should the consumer pay for the wrong reading of the international market by a business house? Reliance Petroleum Ltd (rpl) almost got away slapping a bill running into hundreds of crores of rupees on domestic consumers when the petroleum ministry cleared a proposal whereby the company would be compensated from the Oil Pool Account (opa) for losses it incurs in its petro-export operations. In other words, the country would be paying for the incorrect and ambitious projections of the Ambanis.

Providing compensation for rpl was cleared on October 23 by the then petroleum secretary, S. Narayan. But later, when the proposal was sent up for final clearance to the Union minister of petroleum, Ram Naik, he took his time, fuelling speculation in the industry that the legendary Dhirubhai Ambani clout had worked. Naik, however, rejected the proposal and passed an order to the effect that export losses should be absorbed by the company rather than by the opa. The minister's office confirmed that the compensation package had been scrapped and that Narayan's recommendation that "Option A' or compensation for losses had been over-ruled.

But why did Naik reject it? According to sources, he may have bowed to pressure from sections in the rss. Others say that an earlier sop given to the rss when money from the opa was paid for additional use of oil tankers earlier this year came in for criticism from Opposition parties. That may have given the minister second thoughts.

There's nothing to prove rpl had itself mooted the proposal; the bureaucrats seemed only too happy to help the firm. The genesis of the problem lies in rpl getting the clearance to up its refining capacity to 27 million tonnes of crude oil last year. Says an official: "When the petro-sector went through partial deregulation, rpl seized the opportunity as the company was sure of selling in the international market. But the international markets are volatile and often the best predictions go awry."

As per the Letter of Intent between rpl and public sector oil companies, the latter would pick up the end products—motor-spirit, high-speed diesel oil, aviation-turbine fuel, lpg and kerosene—from the refining of 15 million tonnes of crude oil. Even here, the offtake would be subject to domestic demand. No commitment had been given beyond this. It was for Reliance to tap the international market to sell the other 12-million-odd tonnes of crude oil.

The offtake from the various refineries is decided by the Oil Coordination Committee, which periodically calls a supply plan meeting. The refineries are also invited to the meeting. Each is given a quota based on a "least lost transportation model'. This domestic demand requirement is what the public sector oil companies are committed to buy from the refineries.

Notes a finance ministry official: "There was no question of buying beyond the 15-million-tonne mark because that was sufficient to meet domestic demand. The rpl contention is that until such time that it was given market access in 2002, it has to be covered for its losses. But our view is that the psus are only to compensate for the commitment they have made and not for additional crude oil being processed by rpl."

According to official sources, as for the refined products of the 15 million tonnes of crude oil to be picked up by the psus, a mandated price had been agreed upon. When rpl's capacity upped in January 2000, it started out well through petrol exports to various countries, including the US. International demand and prices were healthy. But it ran into rough weather when there was a slump in international prices, including those of diesel.

Thus, the prices that rpl attracted in the international market were less than the prices fixed in its domestic dealing with public sector oil companies. This difference is being seen by the company's strategists as losses made. This is what was demanded by rpl from the opa.

But the petroleum minister has vetoed the proposal strongly recommended by the secretary of the ministry. The latter was of the opinion that support ought to be extended to private companies which have entered into refining. The ministry processed a note dated October 23 and on the same day Narayan, who is now the revenue secretary, was quick to give his okay.

No one knows why the proposal ran into rough weather. At any rate, the first level of clearance had been given without North Block's okay. Says a ministry official: "With all this talk of level playing fields, it would have been unfair to subsidise one company's export losses." That's one level playing field the country can live with.