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Dr Suresh Chandra Sharma, Officer On Special Duty (OSD) Petroleum, Planning Commission

17 Jan 2012

Dr S C Sharma, OSD (Petroleum) Planning Commission, Government of India is engaged in planning and making policies for oil and gas sector. With nearly 30 years of experience in petroleum industry, he has been closely associated with various projects encompassing oil, natural gas, fertiliser and power sector.

In a conversation with InfralineEnergy's Sangeeta Tanwar, Sharma talks about pricing of petroleum products and huge under-recoveries faced by the oil companies. He advocates that there is an immediate need to bring in price parity between various fuels be it coal, gas and diesel. Sharma further suggests that subsidies extended by the government should be in the form of cash.

Edited excerpts.

Is cost plus approach a better option for pricing of petroleum products in comparison to international market based pricing?

The cost plus approach is not the best option for pricing of petroleum products in the country. This is so because we are heavily dependent on oil imports to sustain our energy needs. Most of our oil requirements are on international price parity and with huge fluctuations in international oil prices, cost plus approach will not work for the Indian market.

Oil marketing companies (OMCs) face huge under-recoveries with high subsidies on oil and LPG. What is the way forward for addressing the issue of under-recoveries of OMCs?

In principle, the petrol has been deregulated and OMCs are undertaking price revision from time to time. But these hikes are too small to compensate huge under-recoveries faced by OMCs. It is estimated that OMCs are incurring losses to the tune of Rs 70,000 crore per year on account of oil subsidies alone.

"Our current fuel pricing has resulted in a lot of aberrations. Huge price differential between various fuels is creating lot of inefficient use of fuel because people find x fuel more economical over y, simply because it is priced lower."

To reduce these losses, one has to raise the prices of the petroleum products. LPG too should move towards market driven price.

With rising petrol prices, diesel is becoming the preferred fuel for consumers. What is the way forward for ensuring that the subsidy on offer on one fuel is not misused by people at large?

A group of ministers as part of Unique Identification Authority of India is working towards direct transfer of subsidies to below the poverty line (BPL) families. It proposes direct cash transfer to BPL families.

Fuel should be priced based on their efficient heat value utilisation. Our current fuel pricing has resulted in a lot of aberrations. Huge price differential between various fuels is creating lot of inefficient use of fuel because people find x fuel more economical over y, simply because it is priced lower. When you have distorted price mechanism, people will go for the cheapest fuel. Therefore, we have to bring in price parity between different fuels.

Indian refinery sector and companies such as Indian Oil experienced a tremendous turn around in the 11th Five-Year-Plan (FYP). Going forward, what will be the major focus of the 12th FYP?

By the end of 11th FYP, we will have a refining capacity of 230 million tonnes, which proves to be a significant gain over the 10th FYP, when our refining capacity stood at 130 million tonnes. This surplus product and much of this incremental capacity are going to be used for exports and to meet our increasing domestic needs.

The 12th FYP will also focus on efficiency improvement and enhancing the economies of scale for vintage refineries, which have been earning lower margins. Fuel improvement and upgradation to EURO V by refineries are other focus areas for the 12th FYP.

Retail outlets of private retail players like RIL, Shell and Essar have been stranded for long. What steps can be taken by the government to encourage greater participation of private players in marketing?

The major reason for private retailers shying away from the market is the volume of diesel being sold in the country, which is much higher than petrol despite the petrol prices being dismantled. With huge subsidy on diesel and government's support to OMCs in meeting their under-recoveries, it acts as a discouragement for private players to step in retail.

"The discovery of shale gas can be a game changer for LNG markets. China, Canada, Australia, Poland and South Africa are going ahead with shale gas expansion programme."

Since we favour market prices for petroleum products, in times to come, we will see private players coming back to business. The private players will prove to be real competition to retail outlets run by the public sector oil companies.

At present we have multiple gas prices in the country. How can the government ensure a uniform and transparent gas price mechanism to bolster investors' and consumers' confidence?

The gas market in India has evolved over the past 20-25 years. It was in 1980 that Oil Natural Gas Corporation of India and later Oil India Limited (OIL) started producing gas. This gas followed cost plus price mechanism and was uniformly priced. The country started importing liquefied natural gas (LNG) in 1992 to meet increasing requirement for gas by fertiliser and power plants. This gas was priced differently. In-between, some marginal fields were given to private firms for development at market prices. This resulted in JV prices for gas, as is the case with Panna-Mukti fields. And these prices have come at different periods of time.

Now arriving at a gas price, which is harmonious and acceptable to all, is going to be difficult. Because we have number of contracts arrived at by different consumers and buyers and these are legally bound contracts. Again, we would always have this price differential between imported gas and domestic gas. Imported gas prices cannot be controlled. The domestic gas prices are market determined price and it has to be in line with whatever global parity is prevailing in the world.

How can we move towards more affordable LNG contracts with international gas suppliers?

I do not see the possibility of suppliers offering cheaper LNG to developing countries unless and until the market is flooded with LNG on long-term basis. Ideally, all the markets should be considered uniform. However, the fact of life is that at any given opportunity no one would like to sell you LNG at lower prices. Today, spot cargoes are being sold to India, China, Japan and Taiwan at US$15/MMBtu, which is way higher in comparison to Qatar selling LNG to US at US$ four-five/MMBtu.

The discovery of shale gas can be a game changer for LNG markets. China, Canada, Australia, Poland and South Africa are going ahead with shale gas expansion programme. Once we have good quantum of shale gas coming in, LNG prices will go down. However, we will have clarity on quantum of shale gas coming in to production at these places in the next four to five years.

(InfralineEnergy thanks Dr Suresh Chandra Sharma, OSD (Petroleum), Planning Commission for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)