Related Stories ‘I am not willing to believe that Muslims are behind all acts of terror in this country’Everything has gone back many years‘India is still the most difficult place in the world to do business’The RSS doesn’t run the BJP, the BJP runs the BJP‘In 2005, we asked the Left partners to reconsider our support to the Government. But they said no’

 •P Vaidyanathan Iyer: Mr Behuria is one of the most visible faces of corporate India, particularly now with crude oil prices scaling new heights. In the last couple of years, Mr Behuria has been battling on many fronts with the government’s continuous postponement of a price hike in fuel products. The marginal price hike this month, does not really help IOC as he will explain.

•SARTHAK BEHURIA: I just want to give you a little background because everybody thinks that pricing is the only issue for oil companies.

The oil industry was nationalised in the 1980s when the government felt a need to protect it, develop it, and to encourage investment in it. The industry was compensated under the fixed price regime and a fixed return regime. All decisions — the production of crude oil, refinery processing or expansion, expenditure on investment, purchase of crude oil, etc — everything was regulated through a mechanism called the oil coordination committee. It had 20 pool accounts whether it related to crude oil price equalisation or refinery compensation. All the credits that companies made went into that pool account and all were paid a fixed rate of return on investment. Everybody was very happy because they got 16 per cent assured return.

This continued till about 2002 when the private sector entered the industry, in particular Reliance. From the historical perspective, Reliance would have been compensated on a cost-plus basis. But the government decided it was time to deregulate the industry, not only because of Reliance but also because the government felt the oil industry must compete in the globalised world. First, they deregulated the lubricants’ market then they deregulated refinery investment. Thereafter, they brought in parallel marketing for kerosene oil. Now anybody can import kerosene oil and market it.

In April 2002, the government decided that everything would be based on free market principles. The upstream companies would get import parity prices and sold products to marketing companies on import parity rates. This included freight, shipping charges, custom duty and excise duty as these products are imported from other countries. The prices would be revised every fortnight, particularly in the case of petrol and diesel. The prices of all other products would be revised every month.

On April 1, 2002, the prices of all products were fixed at certain rates. The government made exceptions, that was on kerosene oil and LPG. They said that these are public distribution products for the poor, so we will continue a subsidy regime on kerosene oil and LPG. The government would commit itself to about Rs 75 a cylinder. That means if our refinery gets a price of $ 400 per tonne of LPG then we would add our margin and deduct it by Rs 75. A similar principle is followed in the case of kerosene with a Rs 2 per litre subsidy. In 2005, the oil marketing companies were to be allowed to sell a market driven price.

Unfortunately, in the run up to Iraq war, the prices of kerosene, diesel, LPG, petrol and other products went up much more than we expected, particularly during 2004-05. So, while we had official approval to increase the price of LPG, petrol, diesel and kerosene, the government did not allow us to change the price of LPG and kerosene. From 2005 onwards, the government stepped in to have informal control over pricing of petrol, diesel, kerosene and LPG.

Till about a year ago, the average crude oil price was $70-75 per barrel. Then it went to $ 100. Today, the price of petrol and diesel is about $ 150-160 per barrel. We are losing around Rs 500 crore per day on the sale of petrol, diesel, kerosene and LPG. The sale of these four products constitutes about 65 per cent of our sales. Last month, the situation came to a head when our borrowing went up from Rs 35,000 crore to Rs 41,000 crore.

Last year, the oil industry lost about Rs 77,000 crore on the sale of these four products. Since upstream companies were reaping the benefits, they shared one-third of the loss. The government said, one-third would be shared by customers, but that did not materialise. The remaining one-third was to be shared by oil marketing companies.

The government decided to give us Oil Bonds to compensate us. We said to the government — the bonds are just a piece of paper. They also realised that we would not be able to invest, if we don’t make profits. Last year, the government gave us Rs 35,000 crore worth of bonds for our Rs 77,000 crores under-recoveries. We received about Rs 26,000 crore, or one-third of under-recoveries from upstream companies. Finally, we ended up losing about Rs 10,000 crore with a profit close to Rs 7,500 crore.

During the past six weeks, crude touched $ 130-140. At this rate, the under-recoveries would touch Rs 2,30,000 crore this year. In such a situation, even the upstream companies would be unable to share the burden of loss. Their total turnover is Rs 70,000 crore, how can they pay Rs 80,000 crores. Our borrowings are going up to Rs 41,000 crore. There will be a situation when we won’t have money.

Also, due to availability of cheap fuel, there is a huge distortion of demand. The growth in demand of fuel is 20 per cent where all our projections say it should be five per cent. And, there is no public consciousness that India is a petroleum products importing nation. LPG is being used for heating bath water in winters. Also, there are unintended distortions in the subsidised regime: the irony is that when the prices go up, the demand should come down. But because of the artificial subsidy, the demand is going up and the prices are going up again.

•Smita Agarwal: A Union minister recently remarked before the price hike was announced that given the balance sheet of OMCs, they have enough room to survive for the next five years. Please comment.