Are oil sector reforms off track?

Petroleum sector meets close to 45% of the commercial energy needs of the country. Reforms in this crucial sector are important to promote investment and energy security; improve access and quality of service; and reduce costs and environmental impacts. Over the last 20 years efforts have been made to increase private participation in exploration and production, in refining and to even introduce competition in limited product categories such as lubricants and some bulk distillates. Among the significant achievements have been the setting up of large refining capacity in the joint and private sectors and the fact that a large and increasing part of the domestic oil and gas reserves is now managed under production sharing contracts. However, at the consumer end, the state has a large and visible presence and even the sole private refiner is selling through PSU marketers. As a result, the public face of the oil sector has remained just that public. The five year (1997-2002) phased programme for the dismantling of the APM was pioneering, bold and yet pragmatic. While it survived a full political cycle involving all ideological hues, it was not succeeded by a new era of vibrant petroleum markets. As such, we still have subsidies on LPG and kerosene. There is no private presence in retail, no independent regulator, and most large cities are choking with air fouled by adulterated fuel. In this situation, does the Supreme Court judgement represent a major setback? The answer is both yes and no. Yes, to the extent that it empowers and emboldens organised opposition to reforms per se, impacting not just petroleum sector but all other reforming sectors. Further, since HPCL would constitute a major part of the retail presence of any new retailer, the prospect of prolonged uncertainty about its disinvestment clouds the picture for all potential players and delays their roll-outs. Therefore, the government should either sell or close shop quickly. No, largely because the challenge of reforms in the sector is much wider and requires a bold new vision of promoting competition. This would mean an explicit policy focus on levelling the playing field and lowering or eliminating entry barriers. It would also mean provision of a predictable investment climate and protection of consumer interest by an independent regulator. Ideally, the regulator should be in place even before privatisation is attempted. Therefore, ironically, the Supreme Court verdict, like the purchase of IBP by IOC earlier, is yet another opportunity to get the sequence of reforms right. To be sure, pending the passage of the Petroleum Regulatory Board Bill, the government has stepped into the role of the regulator by issuing guidelines. But going by the action on the ground, it seems the industry is not enthused. Apart from the shadow of uncertainty emanating from the HPCL disinvestments process, the lack of regulatory certainty and transparency could well have contributed to this. Regulation needs credibility, commitment and capacity to continuously respond in a transparent manner to the challenges of developing a competitive market. These are difficult to achieve in the regular set up of the government. Therefore, setting up of the Petroleum Regulatory Board should be high priority. The other area that needs attention is the reduction of subsidy on LPG and kerosene. The subsidy on LPG usage in its current form lacks economic or social rationale. Also, it is iniquitous and hinders the development of a competitive market in LPG distribution. The subsidy on kerosene should be adjusted to minimise incentives for adulteration. Better targeting and other ways could be found to provide social support to the poor who do not benefit much from the current arrangements. The playing field should be levelled by making the long overdue move to the open acreage system in exploration licensing. Entry barriers in the form of large capital commitments should be lowered to enable the development of a pluralistic petroleum retailing industry. With non-discriminatory access pricing for bulk sales to retailers, synergies with the general retailing industry could be exploited and costs to consumers reduced. To sum up, while the government grapples with the judicial verdict, there is much that remains to be done to further reforms.