Deregulation of diesel prices is one of the big decisions taken by the government for the Indian oil & gas industry. It has various benefits for the public as well as private sector petroleum refiners. However, looking at the larger picture, it will also show positive results for the Indian economy as a whole.
Recently, the government fully deregulated diesel prices in India. Earlier, it partially deregulated diesel prices effective from January 18, 2013 by allowing Oil Marketing Companies (OMCs) to raise the retail prices in small amounts periodically until the entire loss is made up, and by decontrolling bulk diesel prices. Petrol prices were already deregulated by the Government since mid-2010.
Now that the prices of two major petroleum products have been fully deregulated, it is likely to benefit OMCs or the public sector petroleum refiners, private refiners, upstream oil and gas public sector companies, and Indian economy as a whole.
How Companies React to Deregulation of Diesel Prices
Public sector petroleum refiners viz. Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), also known as OMCs, have been making huge losses on sale of regulated petroleum products viz. diesel, domestic liquefied petroleum gas (LPG) and PDS kerosene (i.e., kerosene sold through public distribution system) at below-cost prices.
With deregulation of diesel prices, the losses (under-recoveries) are likely to be reduced substantially as it accounted for a significant portion of total under-recoveries (refer to Table 1). Diesel alone contributed to 58.6 per cent, 57.2 per cent and 44.9 per cent of total under-recoveries respectively in 2011–12, 2012–13 and 2013–14. Though OMCs are compensated for their losses by the government and government-run upstream oil and gas companies viz. Oil and Natural Gas Corporation Ltd (ONGC), Oil India Ltd (OIL) and GAIL (India) Limited in the form of subsidy, there is uncertainty in timing and amount of disbursement of subsidy, which adversely affects the finances of OMCs.
Thus, after deregulation of diesel prices, their finances are likely to improve significantly. Improved finances can enable them to invest in plant and machinery to increase refinery complexity and, hence, improve their refining margin, which is currently far below the private refiners viz. Reliance Industries Ltd (RIL) and Essar Oil Ltd (EOL). Gross Refining Margin (GRM) of IOCL, BPCL and HPCL for 2013–14 stood at $4.24 per barrel, $4.33 per barrel and $3.43 per barrel respectively-far below that of RIL at $8.1 per barrel and EOL at $7.98 per barrel. Obviously, there is much scope for public sector refiners to improve their GRM.
Benefit to Private Petroleum Refiners
Private refiners RIL and EOL have not been in a position to sell diesel into the domestic retail market because retail diesel prices were regulated and they could not sell diesel at a loss as unlike with public sector refiners, no compensation from the Government was available to them. Hence, they could either export diesel or sell it into the domestic retail market through public sector refiners (OMCs) only. Deregulation of diesel prices provides a level playing field to private refiners who can sell diesel directly into the domestic retail market. With petrol prices already deregulated, they can invest on the necessary infrastructure to expand their network of retail outlets to sell diesel and petrol into domestic retail market without compromising their profitability.
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