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Selloff to choke Indian Oil refineries

New Delhi, Oct. 4: The government’s proposal to privatise the vast retail network of Indian Oil Corporation (IOC), which commands a 56 per cent market share, could spell disaster for the country’s hydrocarbon sector.

Privatising IOC’s nationwide network of 23,000 retail sales points would leave the company’s 50 million tonnes per annum refining capacity without a direct marketing outlet. In effect, apart from losing its high-profit-making retail marketing network the company’s refineries would also be destabilised as there would be no assured marketing outlet for the output.

Since IOC owns 10 of the 18 refineries in the country this has grave implications for the nation’s painstakingly built petroleum sector.

Mangalore Refinery and Petrochemicals Ltd (MRPL) represents a classic example of a state-of-the-art refinery that plunged into the red because it did not have a marketing network of its own. A senior IOC official told The Telegraph, “IOC’s refineries would probably go the same way.”

Reliance Industries, for instance, has set up a 27 million tonnes refinery but does not have the retail network to market these goods. It is dependent on the public sector oil companies to market these products. It wants to shed this dependence and has, therefore, been eyeing the lucrative marketing chain of the public sector oil companies.

Both Shell and Reliance are aware that a long gestation lag is involved in setting up a nationwide chain of retail outlets and the infrastructure of depots and pipelines to back it up. Even more important is the fact that the prime locations for retail outlets in the metros and major cities are already under the control of public sector oil companies and there is no more space available.

The national oil companies have a headstart and it is only by taking over their networks can they make a headway in marketing operations.

The proposal to privatise IOC’s retail marketing chain would thus only serve to reverse the situation.

The privatisation proposal also has serious political implications as it will be more difficult to hold the priceline of petroleum products such as domestic LPG and kerosene. At present, IOC is footing a major portion of the subsidy bill for these two products. The price of LPG would shoot up by Rs 105 per cylinder and that of kerosene by Rs 3 per litre if market rates were to be charged.

According to the officially stated policy, the subsidy on these two cooking fuels was to be phased out and their prices pegged to the international market. However, in practice the government has not been able to implement the decision for fear of a voter backlash.

The national oil companies are being forced to sell these products at prices below the market rates. Private companies such as Reliance which market LPG and kerosene though the public sector companies, on the other hand, are paid the full market price. The loss on these transactions is borne by the PSUs. Since IOC is the largest company it bears the largest share of the burden as well.

Apart from LPG and kerosene, the public sector oil companies are often asked not to increase the prices of diesel and petrol when international prices soar in order to prevent an adverse political fallout. For instance, the retail margins of the PSUs were deliberately depressed during the run up to the Iraq war when international prices rose.

When international prices suddenly shoot up, oil firms are asked to provide cushion to the consumers by not passing on the entire increase in the price of petrol and diesel. This would not be possible once this huge retail chain passes into private hands. This factor is bound to weigh on the government’s mind once Shourie’s surprise proposal is given further thought.

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