Oil and gas is one of the core sectors and has a significant impact on all other sectors of the economy. The growth in demand for petroleum products is always in conjunction with the rate of growth of the gross domestic product with increased activity in manufacturing, construction, mining, agriculture and service sectors having a direct impact on the fuel consumption and vice versa. While these external factors decide the top-line growth of oil companies, the profitability always depends on factors such as the crude oil price, refining margins and marketing price realizations. With India dependent on imports for a major portion of the crude oil needs of the country, the Indian oil companies have been exposed to the volatility of the international crude oil market. Several of the refineries are characterized by comparatively lower complexities. On the marketing front, till recently, the companies had limited flexibility in deciding retail pricing. All these have had an impact on the top-line growth and profitability. The sector was therefore in need of critical and accelerated reforms.
In this context, the policy interventions that the government has made over the last three years have been remarkable and historically significant. While the favorable scenario in the international crude oil markets have been beneficial for import dependent countries like India, the industry has benefited on account of some path breaking reforms undertaken by the country.
The key reforms undertaken include the diesel price deregulation, implementation of PAHAL (DBTL) which is the world’s largest Direct Benefit Transfer scheme for transfer of subsidy for the domestic LPG consumers and the Pradhan Mantri Ujjwala Yojana (PMUY) which aims to provide LPG connections to over 50 million women members of below poverty line (BPL) households over a three year time frame.
The price deregulation has provided the oil marketing companies with the much required flexibility in deciding retail prices and thereby manage their margins. DBTL has ensured the efficient and effective transfer of subsidy on LPG directly to the bank account of the consumer thereby eliminating leakages in the subsidy mechanism. The PMUY scheme is aimed at improving the wellness of the women in substantial way which provides them social empowerment and the economic benefits of the over hours increase in their working time will have further economic benefits and bring about improvements in their standard of living.
These measures have given immense confidence to the oil and gas sector to make large investments in capacity building, storage, pipelines and marketing network infrastructure development and improving efficiencies and quality of fuels to match the global environmental norms.
In addition, the other policies of the government to kick start growth in the manufacturing sector through the Make in India initiative, infrastructure development like building of national highways, port development, new airports, smart cities, and upliftment of rural economy with various social and financial inclusion projects also boosted the growth perspective for the sector. The key tax reforms like the goods and services tax will further accelerate the growth in the future.
As India is projected to be the fastest growing among major economies, the oil and gas sector has a major role to play in meeting the growing energy demand. Already petrol is seeing strong growth consistently in the last few years and with increasing urbanization and the rising middle class, this growth can be expected to continue. Further the focus on the growth of the rural economy and the improved standard of living will also have a positive impact on the growth. As the economy picks up, a similar scenario will be replicated for other products also.
In this scenario, the oil and gas sector is poised to support the growth in the economy in the coming days. The newly commissioned refinery capacities will mean higher production of fuels. The private sector is expanding its presence in the refining and marketing of transport fuels. As competition scales up, companies will be rolling out new consumer oriented offerings in the market. The deployment of technology will enhance the customer experience at the fueling stations. Since large segments of the BPL population will shift to better cooking fuels like LPG, the consumption of kerosene will continue to decline.
The government’s plans on consolidation of the public sector oil companies is also seen as a move in the right direction in the long term perspective of the sector. Attaining size and scale will become necessary to be competitive in the emerging market situation and to deal effectively with the challenges of the anticipated exponential growth in demand in the next decade. Competition is building up in the market where large domestic and foreign companies are contemplating aggressive market participation. Although there were apprehensions about creation of a unified entity with chances of operational and cultural bottlenecks, the government has already clarified that there will be multiple entities created through synergetic mergers.
But, there are still challenges ahead. With the recent agreement on curtailing production amongst the major oil producers, international crude prices are expected to recover gradually over the medium to long term. The exploration sector being capital intensive, low prices can act as an impediment. Reduction in exploration and development budgets can adversely impact development of new reserves leading to price spikes when demand exceeds available supplies. So, the government should remain focused on achieving the set goal of reducing import dependence. It should also continue promoting domestic exploration through market oriented policies on price realization, stable tax policies and incentives and ease of acquisition and fast tracking of the regulatory and statutory approvals. This can encourage and support Indian companies in their efforts to ensure better energy security for the country.
On the infrastructure front, the development of a national oil and gas corridors akin to north south east west highway corridor is essential for meeting the growing demand and efficient transportation of fuels from the refineries to the markets. The government needs to look into acquisition of land for such corridor and encourage public and private participation for the development of such infrastructure on common user facility model. As these are high capital outlays with long-term gestation and returns will be lower in the initial years, a financing structure either with viability gap funding or infrastructure financing concessions can be considered. Alternatively government can evaluate creation of such infrastructure on its own as in the case of creation of strategic crude oil reserves.
Further in this era of disruptive technologies, the long term strategic national plan for transportation model need to be put in place. Like the solar power generation strategic plan and targets, the road maps for electric vehicles in the mass transportation system as well as the commercial transport need to be drawn. The government also needs to draw a long term strategic energy policy in the in the areas of petroleum, unconventional fuels, and renewables so that the long term capital investments can be optimized to meet the growing energy needs of the economy.
Guest Author
The author is former director (finance) of Bharat Petroleum Corporation Ltd.
