Worlds Apart? – The Sectoral Divergence in the Indian Petroleum Refining Industry

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Pricing – the Power of Marketing Companies

Most of the products of public sector refineries are sold through oil marketing companies (OMCs) viz IOCL, BPCL and HPCL. Price of fuels such as diesel, PDS kerosene (that is, kerosene sold through public distribution system) and domestic LPG is controlled by the Indian government.

Although the Indian government has partially de-regulated diesel prices in January, 2013 by allowing OMCs to raise the retail prices in small amounts periodically until the entire loss is made up, and by decontrolling bulk diesel prices, the prices are still not fully deregulated. Ongoing price controls force OMCs to sell their products at below-cost prices and incur revenue losses.

Although the state and state-owned upstream oil and gas companies—ONGC, Oil India Ltd and GAIL (India) Ltd—compensate for the losses of the OMCs through subsidies, the degree and timing of the compensation remains uncertain. This impacts the financial position of OMCs.

Export the Only Option for Private Refiners?

On the other hand, private sector refiners do not get any subsidy or compensation. Therefore, they cannot sell their products into the Indian retail market at below-cost prices and are only left with options of export, sale to OMCs and bulk sale. Private refiners sell diesel, kerosene and LPG to OMCs at trade parity price (80 per cent of import parity price + 20 per cent of export parity price) that forms the basis for the amount of subsidy to OMCs by the government and government-owned upstream oil and gas companies.

However, private refiners can sell their products to OMCs to the limited extent that is required to meet domestic demand. Consequently, they have to export the surplus amount of their products.

The export price for private refiners is determined by market forces. Thus, price controls keep the private refiners at a competitive disadvantage as they have to compete with other players in the international market for which their products should meet international quality standards. This means they have to invest more in plant and machinery to produce high quality products.

However, this also provides them the opportunity to become globally competitive and establish their brand at global level. Ironically, trade parity price, which forms the basis for OMCs to receive the quantum of subsidy and which private refiners get from OMCs, is not determined by market forces but, is a formulated price.

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