Refined Product Pricing and Refinery Investment

India is the 4th largest consumer of rough oil and crude oil merchandises after United States, China and Japan. Its merchandise ingestion has grown by 5.2 % during 2009 despite the effects of planetary recession. India is forecast to go universe ‘s 3rd largest oil consumer by 2014 although the mean per capita ingestion rates are below OECD norm. India ‘s engagement in planetary energy markets in future, particularly refined merchandise and petroleum markets depends on its pricing, regulative and investing kineticss in downstream crude oil sector. Downstream investing in India in hereafter will find the success of the Government of India ‘s ambitious policy to set up a universe competitory refined merchandise export industry in India.

Cardinal policy ends in Indian Petroleum refinement and retail

Government of India ‘s 11th five twelvemonth program ( 2007-2012 ) physiques on the Integrated Energy Policy of 2006 to sketch the key policy ends for India ‘s refinement and retail sector. It includes

Market based pricing through downstream value concatenation.

Increase the refinement capacity to run into the turning demand.

To set up India as competitory liquid fuels exporter and take advantage of spread outing fuel demand in East and South East Asia.

Guaranting Indian refineries are equipped to treat inexpensive, rancid and heavy petroleums while bring forthing internationally-recognised clean-product classs.

The most of import would be establishment on India as World competitory exporter of refined merchandises. India ‘s outgrowth as a world-competitive liquid fuels export hub depends on large-scale refinery investings by oil selling companies and private-sector refiners.

Down Stream Regulation:

The Petroleum and Natural Gas Regulatory Board ( PNGRB ) was established in 2007 to modulate the downstream sector. It is tasked with modulating the refinement, processing, storage, transit, distribution, selling and gross revenues of crude oil merchandises and natural gas. The refinery substructure building is controlled by Ministry of Petroleum and Natural Gas. The chief map of the board is to move as a tribunal of arbitration in differences within the downstream sector. It has powers to let go of stamps, and grant of mandate to put, construct, operate and expand metropoliss natural gas distribution webs.

PNGRB has power

To look into and litigate against downstream operators for monopolistic behavior.

Register entities to market and retail crude oil merchandises, and supervise these entities for instances of debasement.

It has power to empower operators to put merchandise grapevines, and find whether grapevines are private or common-carrier.

Regulate entree to grapevines and grapevine transit rates.

PNGRB besides proctors monetary values through the downstream value-chain, determines and enforces proficient criterions and specifications associating to downstream activities. PNGRB does non hold authorization over two cardinal countries of merchandise pricing and Refinery investing.

Downstream Business:

India ‘s foreign investing government has been liberalised significantly since the late-1990s. All private-sector refinement undertakings have automatic foreign investing blessing and can be 100 % foreign-owned. In PSU ‘s foreign equity has to be approved by India ‘s Foreign Investment Promotion Board ( FPIB ) , and can non transcend 49 % of entire ownership. Minutess on the current history are to the full exchangeable. India has well increased the entree of foreign investors to India ‘s downstream sector through liberalization of foreign investings blessing procedure. The Key barrier to investings in India are complex and slow traveling province mandates and processs for insurance, demographic and environmental impacts, revenue enhancement conformity. India ‘s Particular Economic Zones ( SEZs ) and Export-Oriented Units ( EOUs ) were established mostly to help concerns puting in cardinal industries and take these barriers.

The composite, mutable and highly-differentiated revenue enhancements and responsibilities cut down the borders for downstream sellers and retail merchants. One of the cardinal constituents of 11th Five twelvemonth program is to streamline, simplify and standardize the crude oil merchandise revenue enhancement government to guarantee cosmopolitan revenue enhancement constructions between legal powers and merchandises.

Petroleum Pricing in India:

Administrative Pricing Mechanism ( APM ) :

APM was used to find the pricing of Petroleum merchandises until 2002. These merchandise monetary values were administered by Government of India based on “ Cost of Operating Capital Plus expression ” .

Up to 1939, there was no control on pricing of crude oil merchandises. Between 1939 and 1948, the oil companies maintained pool histories without any intercession by the authorities. In 1948, effort was made to modulate monetary values through Valued stock histories process. Under this process realisation of companies was restricted to import para monetary value. In 1976 Oil Pricing Committee recommended the discontinuation of import para rule on the land that about 90 % of the entire demand of crude oil merchandises was met by autochthonal production. APM was evolved on recommendation of Oil Pricing Committee and came into being in 1977. The of import drawback of import para pricing was cost of pricing was overlooked while finding manufacturer monetary values. With the disposal of pricing of merchandises by the authorities, the keeping mechanism was called Administrative Pricing Mechanism. APM was dismantled in 2002.

Under the new mechanism, Oil Marketing Companies are free to put retail merchandise monetary values based on import para pricing. The domestic refinement and retail sector was besides opened to private-sector houses, which led to private sector retailing presence by houses like RIL. Subsidies funded from authorities ‘s budget are maintained on LPG and Kerosene. These subsidies are present as LPG and Kerosene are cooking fuels for India ‘s low-income population. Retail monetary values of crude oil merchandises fluctuate with alterations in monetary value of India ‘s petroleum basket. The post-APM merchandise pricing government get downing in 2002 was adhered really briefly by authorities of India. With the rise in petroleum monetary values get downing in 2004, the authorities tried to curtail the ability of Oil Marketing Companies to increase retail monetary values. By mid-2004, the post-APM theoretical account of merchandise pricing had been efficaciously abandoned, with the authorities centrally commanding upward monetary value alterations.

Lower merchandise monetary value than petroleum input monetary values is increasing the accretion of under recoveries of oil selling companies. Under recoveries are fanciful steps stand foring the difference between the trade-parity cost of refined merchandise paid by oil selling companies and the sale monetary value? Trade para monetary values depend on a assortment of factors such as contract monetary values and conveyance costs, which mean that they are to be present on balance sheets of marketing companies.

The Indian domestic merchandise monetary values have non risen in line with the addition in international petroleum monetary values that has occurred since 2004-05, and have placed a important subsidy load on oil selling companies.

It is observed from the above graph that under recoveries have escalated aggressively from less than 10 billion during 2004-2005 to 30 billion during 2008-2009.

The load of under recoveries has affected the operational operation and fiscal wellness of oil selling companies earnestly. Between April and December 2008, India ‘s three cardinal oil selling companies like HPCL, BPCL, IOC have lost about 25 to 35 % of the entire net worth. Government of India has looked for alternate solutions for under recovery issue. Upstream oil and gas PSU ‘s provided oil selling companies with discounted petroleum.

Government of India has issued off-budget “ Oil Chemical bonds ” to marketing companies to get the better of the fiscal and commercial issues produced by the current merchandise pricing. The issue of Oil Bonds has significantly reduced the under recovery load.

Oil Chemical bonds:

Oil bonds issue is the cardinal tool for cut downing the crude oil pricing issue. The oil bonds issued by authorities have adulthoods runing from 5 to 7 old ages. There are besides tradable bonds which can be sold on bond markets to bring forth liquidness. Non tradable bonds can be used by marketing companies as collateral to raise hard currency. Indian oil bonds can non be counted as verifiable liquid plus in the militias of Indian Bankss to do up Statutory Liquidity Ratio.

Rationalization of Taxes and Duties:

To cut down the under recovery load of oil selling companies, authorities has looked to rationalize the revenue enhancements and responsibilities on crude oil merchandises. The decrease in proportion of accomplished monetary values that are made of revenue enhancement will cut down the under recovery load of companies.

The rationalization of crude oil merchandise monetary values and revenue enhancements has been imbalanced and uneven. State authoritiess in India have been unwilling to find these inelastic beginnings of gross. States have moved to level rate construction in order to cut down the force per unit area on monetary values during the addition in rough cost.

By cutting revenue enhancements the authorities of India is cut downing a important beginning of gross, which may be spent in support of basic developmental programmes, while supplying merely a really partial and uncomplete solution to the crude oil pricing issue. Reducing revenue enhancements will do it really hard for future authoritiess to raise revenue enhancement rates on crude oil merchandises in the hereafter, striping policy shapers of a cardinal demand-side direction and environmental policy tool.

The moderateness of international oil monetary values in 2009 an 2010 took some of force per unit area from the pricing issue, with under-recoveries diminishing somewhat and oil selling companies necessitating less fiscal aid from the authorities.

Risks & A ; Challenges

Emerging Regional Excess Capacity:

There are several hazards for India to go largest exporter of crude oil merchandises in India.

Most of import one is unprecedented outgrowth of structural surplus refinement capacity across Asia-Pacific part. China has added 600,000 bbl/d in 2008 and has added around 800000 bbl/d in 2009, which is larger than India ‘s add-ons. During the same old ages Japan and Korea faced worsening refined merchandise demand. With a really weak local, regional and planetary demand, smaller refiners such as Thailand and Taiwan have faced increased excess capacity in 2009. Refiners across the part are looking for the same export markets to absorb their excesss. Alternatively, refineries will be forced to significantly cut tallies, or to see sectoral consolidation.

Falling Refinery Investments in India

Developing regional surplus capacity in short term to medium term has reduced the refinery investings in India. Recognizing this regional surplus capacity, authorities of India has reduced refinery capacity add-on as cardinal commercial precedence, taking its income revenue enhancement vacation on undertakings commissioned after 2012. In contrast to decelerate refinery capacity after 2012 domestic demand in India is expected to hold strong growing. The decrease in extra capacity will necessarily ensue in lower merchandise export volumes from India. With strong domestic demand and sulky capacity add-on, by 2015 India is no longer calculate to be the largest refined merchandise exporter in Asia, with exports falling to merely over 1.2 mb/d. Singapore, on the other manus, is expected to export around 1.4 mb/d in 2016.

In the face of strongly turning domestic demand, for India to truly cement its place as a major international crude oil merchandise exporter ; Indian refiners – both public and private – will hold to keep reasonably high grades of investing to continue degrees of export-oriented refinement capacity.