By R. Sasankan

Capriciousness in policy making continues to bedevil India’s petroleum sector. The authorities persist in adopting policy moves that have left the experts in the field astounded by their irrationality. Let us take the decision to sell the government’s 51.11 per cent stake in Hindustan Petroleum Corporation Ltd (HPCL) to Oil and Natural Gas Corporation (ONGC). HPCL has always been well regarded as an efficiently managed, profit-making downstream public sector unit. But in a policy move that beggars belief, the government endorsed a proposal made by policy think-tank Niti Aayog and sold its stake in HPCL to the cash-strapped upstream major. ONGC, as it turned out, was a reluctant buyer. The HPCL bosses were peeved by the decision and refused – at least initially – to acknowledge ONGC as its promoter before being browbeaten into sullen submission by the authorities and the market regulator.

Now, the government wants to sell its 54 per cent stake in the other Mumbai-based downstream PSU, Bharat Petroleum Corporation Ltd (BPCL). A foreign buyer is being preferred as the government hopes to obtain an attractive price for its stake. Petroleum experts are at a loss to understand the logic behind the government move. “I see little logic in what is happening. One day they sell HPCL to ONGC and, on another day, BPCL to a private investor (domestic or foreign -- what is the difference),” said an acknowledged petroleum industry expert.

There could be fierce competition among foreign companies to acquire the BPCL stake. Foreign oil companies have been keen to enter India’s vast retail market but felt stymied by the virtual monopoly that the state-owned oil marketing companies enjoy over the marketing infrastructure. Even an aggressive marketer like Reliance Industries could not make much of an impact in the retail market. Anyone who wants to succeed in India’s petroleum retail market should acquire one of the existing PSU oil marketing companies. The government seems to acknowledge this reality: it will get a good price for its stake and, at the same time, the entry of a foreign buyer could trigger much-needed competition in the domestic market.

In an energy-starved country like India, the government’s priority should not be to manage the downstream oil marketing companies. It should rather concentrate on adopting policy measures to step up domestic production of oil and gas. This is precisely what the late K.D. Malaviya did when he, in his capacity as the country’s petroleum minister, forced ONGC to hand over its Gujarat Refinery to Indian Oil Corporation so that it could concentrate on E&P activities. ONGC’s remarkable success in its initial years could be attributed to the dynamic leadership of Malaviya.

But some 30 years later, the policy wonks unscrambled the notion of clearly-demarcated turfs in the petroleum sector and permitted ONGC to acquire a majority stake in downstream company MRPL, which was a joint venture between the Aditya Birla group and HPCL.

This policy reversal could be directly attributed to the government’s policy of placing the wrong people in high places. In 2003, when ONGC acquired a majority stake in MRPL, upstream major was headed by Subir Raha, a dynamic leader in the petroleum sector. He was a success at IOC but was a fish out of water in ONGC. With the acquisition of MRPL, Raha was back in familiar territory and was able to turnaround MRPL.

ONGC has suffered from an existential crisis as it has met with very little success in upstream operations – its original remit – since the discovery of Bombay High. ONGC is now in danger of losing its identity as an E&P major unless it discovers a commercially viable oil or gas field. Its overseas performance through its subsidiary, ONGC Videsh Ltd, has been relatively better but its lacks the resources to compete for global assets. The amount that it spent on acquiring the HPCL stake could have been utilised to acquire upstream assets overseas.

One could argue that the government’s policy shift is well intentioned if it introduces competition in the downstream oil sector. Both BPCL and HPCL can be sold to foreign buyers PROVIDED (the qualification needs to be capitalised) the downstream sector is regulated meaningfully. India has a meaningless downstream regulatory Act. Worse, the regulators are incompetent.

The government ought not to play any role in the downstream oil and gas sector if the regulations are clearly enunciated and scrupulously followed. If, on the other hand, the government is keen to oversee that sector, it can retain its interests in Indian Oil Corporation provided it competes on a level field. IndianOil, for instance, could be permitted to bid for BPCL and HPCL.

The government must concentrate on the upstream sector (ONGC and OIL) and oversee pipeline transportation, distribution and storage infrastructure. Above all, the government must control oil diplomacy and enter into viable, transparent and beneficial long-term supply contracts for oil and gas. “If you control the input costs and you have the transmission, distribution and storage assets and a well-regulated downstream sector in place, then you do not care who runs the downstream sector,” said an expert.

Currently, the government does not exercise any perceptible oversight over the crude imports of private refiners such as RIL and Essar. As long as these entities operated as export-oriented refineries, it did not matter. But if private crude importers are allowed to refine and market their products in India, then their oil and gas purchase deals must come under regulatory purview. It might want to replicate the system that confers powers on the electricity regulators to oversee coal purchases by power plants.

What is sauce for gander must be sauce for the goose as well.