The Telegraph
Since 1st March, 1999
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- How the former petroleum minister lost his cap

In the third week of January, Mani Shankar Aiyar was in Peking, trying to persuade the Chinese that both China and India would save money if they bid jointly for oil concessions across the world. He came back, and on Sunday, the Prime Minister took away the petroleum ministry from him. Manmohan Singh taught a lesson to those disparaging commentators who had called him the Good Doctor and a weak Prime Minister. He also showed that someone's closeness to Rajiv and Sonia Gandhi did not protect him from the Prime Minister's privilege of appointing and dismissing ministers. There is much gossip swirling around Delhi for nosy reporters to ferret out. I shall not dwell on the personal aspect of this fallout. It was not maladroitness or misbehaviour that brought Aiyar down. He tried to achieve something as petroleum minister; as a result he antagonized forces that brought him down.

He saw that India had no choice but to depend on importing oil from a world which may run short of it, from countries that were important players or pawns on the international chessboard and from an industry that was cartelized and politicized. To secure oil in this world required India to play power politics and to use its oil companies as arms of state policy. Unfortunately for him, his spectacular forays did not fit into his captain's game plan; so he lost his cap.

The petroleum ministry has in its stable the country's largest and most profitable government companies. Oil and Natural Gas Commission produces some 200 million barrels of oil, mostly offshore Gujarat, at a sixth of its market price; that means almost $10 billion of profits without doing anything. The government imposes higher import duty on products than on crude oil; that means equally effortless profits for the refining companies. The petroleum minister is the ringmaster of these companies, and can exercise enormous patronage through them. The story of oil pump licences, stretching from Captain Satish Sharma to Ram Naik, is well known; that is only the tip of the iceberg. But that patronage is not unfettered. The oil companies have friends all across the political spectrum, made with favours given in the past. So only a na've petroleum minister would tangle lightly with them.

As soon as Aiyar walked into the petroleum ministry, he ran into squabbles between the oil companies. The refining companies envy ONGC its easy profits. They would love to snatch away a part of the profits, and are always arguing that ONGC should sell them oil below international price; after all, they are its younger sisters. They press home the argument by not paying ONGC promptly or fully. ONGC gets fed up with these squabbles, and would like to get into refining and access the final market for oil products. The refining companies have done their best to prevent it from doing so, and have resisted its attempts to buy into them. Finally, ONGC managed to enter refining by buying the Birla's bankrupt Mangalore refinery; but its refining capacity is still a fraction of its crude oil production.

Aiyar thought the solution to the companies' squabbles was to merge them all into one megacorporation. But managers abominate mergers since they reduce their chances of promotion; so Aiyar ran into dogged opposition. Then he thought of the next best thing ' having two corporations, one upstream and one downstream. Since that essentially meant ONGC keeping out of refining and distribution, it resisted the plan. Stories surfaced of Aiyar trying to get rid of Subir Raha. But the conflict was not over Raha; it was over the ministry reining in ONGC. ONGC marshalled its friends across the government, and Aiyar had to abandon his restructuring plans.

Then came the rise in international prices of oil. The logical thing to do would have been to pass on the rise to consumers. This was the objective of the reforms in the 1990s ' that subsidies and cross-subsidies would be abolished. But just as the government was about to abolish them, Ram Naik felt he had to do something populistic, and retained the subsidy on kerosene, which he forced the oil companies to give. After all, they were making huge profits.

Those profits began to erode rapidly as oil prices rose in 2004. The oil companies asked to be allowed to raise prices. Mani Shankar Aiyar had to carry their urgent pleas to the Prime Minister and to the cabinet and argue for a price increase. Both took their time; meanwhile, since petrol and kerosene prices are of public interest, his trips to the finance ministry and the PMO got much publicity. If there had to be subsidies, Aiyar would have preferred them to come from the exchequer. But P. Chidambaram dismissed the idea out of hand. The cabinet approved inadequate price increases as slowly as it could; meanwhile, profits drained out of the refining companies. That made them very unhappy; Aiyar was the target of their wrath, though he was hardly the cause of their plight.

Aiyar tends to get so active that he forgets to look around. But even he eventually realized that in both oil company reorganization and oil price increases, he had courted battles he could not win. He decided to withdraw, but not before he had done himself much damage.

He then took up a campaign for which he thought he could not be faulted ' a campaign to secure oil supplies from abroad. Unfortunately, supplies from all major oil-producing countries close to India are sewn up. The Arab peninsula is largely under American control, and Indonesia mainly supplies to Japan. The only two countries where some uncommitted hydrocarbons are available are Iran and Burma; Aiyar focused on these. As it happens, however, these countries have more gas than oil to offer, and neither is our neighbour. Either their gas has to be liquefied and shipped ' with the attendant investment in liquefaction facilities, terminals and tankers ' or it must be compressed and piped. Onshore pipelines are much cheaper than offshore ' in the case of the gas of Iran, a pipeline through Pakistan would cost roughly $5 billion whilst an offshore one would cost twice as much. So Aiyar started trying to persuade Pakistan and Bangladesh to either build or allow pipelines through their territory.

He could not go far in this endeavour without carrying the foreign policy establishment, and he failed to do so. The Prime Minister opened an option of an alliance with the US which would yield energy as a byproduct ' oil from the Arab peninsula and power from nuclear plants to be built with US technology. That offer was conditional on India opposing Iran's nuclear plans. So foreign policy torpedoed Aiyar's grand strategy ' by blowing him out of the picture.

That was unfortunate, for if we leave Iran aside, Aiyar's plan of making India a hub of oil storage and trade in the Indian Ocean, of securing our oil supplies by creating an India-centred market, is a tantalizing one. It does not conflict with the foreign policy establishment's energy plans for India. I hope that it will not be buried simply because it came from him.

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