Oil sector performance: UPA fails, NDA barely passes

Recently, while making the inaugural speech at PETROTECH-2019, Prime Minister Narendra Modi stressed the point that “at the macro level, the energy sector is a pivot and key enabler of growth”. He discussed four pillars of our energy future: energy access and justice, energy efficiency, energy sustainability and energy security. How have these mantras driven the policies of the UPA and NDA governments in the oil sector, a key component of the energy sector? It is timely as general election nears that we assess their performance.

Modi has been critical of volatility in international oil price and urging for “responsible pricing” to meet the needs of importers and exporters of oil. However, he has not suggested any specific concept, like replacing the futures market which promotes organised “gambling” with spot pricing, which used to prevail before the 1980s. During the last 10 years, oil prices saw a high of $123 per barrel in April 2011 and a low of $31/bbl in January 2016. Such high volatility does not serve anyone except speculators. While UPA-II had to manage with higher average oil price of $105/bbl, NDA had an easy time with a lower average price of $61/bbl.

The UPA-II took the easy way out and reduced excise duties and also forced public sector oil companies to sell petrol and diesel below cost. On the other hand, despite protests, the NDA kept increasing excise duties and collected more revenues to spend on various welfare missions and infrastructure. Also, under the NDA, petroleum product subsidies and under-recoveries improved considerably, though most of it was because of lower oil prices. Higher taxes and lower subsidies resulted in a mindboggling Rs 11 lakh crore in additional money available to the NDA government.

It is a well-established fact that diversion of residential LPG and PDS kerosene is a large source of black money. A few years back, black money generated was about Rs 50,000 crore per year. By introducing Aadhaar-based direct benefit transfer, the government was able to reduce LPG diversion. Also, by implementing the Ujwala scheme of giving free LPG connections to the poor, it was able to increase coverage from 45% five years ago to 90%.

However, the government and the country missed a golden opportunity of removing LPG subsidy as oil prices were coming down. On the other hand, the UPA wanted to restrict the number of subsidised cylinders to six per year. It finally had to increase it to 12, which was meaningless since only 3.2% of consumers use more than 12. Though the NDA wanted to scrap PDS kerosene, it could not even implement DBT to reduce its diversion.

In oil marketing, the Modi government has tried several Tuglaq-ian initiatives. It tried to introduce home delivery of petrol and diesel, blindly following the US example. Without giving much thought, it adopted a policy of changing petrol and diesel prices every day. Such a policy is irrational and does not make commercial sense.

Towards the end of 2018, state-run oil companies decided to double the number of oil pump dealerships in five years at the insistence of the petroleum ministry. Why such a massive increase and that too just before the general election, without any market study to back it up?

Moreover, the government did not attempt to promote competition in oil marketing. In one stroke, they could have prevented the state oil companies from using the same pricing formula. On the other hand, it floated the idea of forming a mega merger of all state-run oil companies to compete with multinationals like ExxonMobil, Shell, BP, etc. It would have been an unmitigated disaster, as in Mexico. The idea was dropped.

Despite the urging of petroleum ministry to bring petrol and diesel under GST to streamline tax collection, the government has done so.

Neither the UPA nor the NDA government has been able to make any progress in reducing oil and gas import dependency. Instead, both oil and gas import dependency has been increasing every year and are currently at 83% and 43%, respectively.

HELP needs help

The Modi government’s new exploration policy, called Hydrocarbon Exploration Licensing Policy (HELP), was a spectacular failure, though the petroleum ministry thought otherwise. It did not attract even one foreign oil company, while only a few domestic private oil companies participated in the first licensing round. The government’s plan of imposing windfall profit taxes on oil producers as oil prices started to climb in 2018 as well as changing from production-sharing to revenue-sharing might have been the reasons.

From 2011 to 2014, the UPA government forced ONGC to pay Rs 1.8 lakh crore to support its policy of forcing public sector oil companies to sell diesel below cost price. The Modi government forced ONGC to buy a loss-making gas field, apparently to prevent the bankruptcy of Gujarat State Petroleum Corporation. Neither UPA nor the NDA government hesitated to use PSU oil companies as their ATMs.

The Modi government’s policy of developing small discovered fields with more than 15 new oil companies in a transparent bidding process was praiseworthy. However, the contribution of this reform has been minimal.

Currently, the biggest energy transition is taking place since the Industrial Revolution, when coal started to replace wood. ‘Peak Oil’ has been replaced by peak demand. Solar and wind energy sources are competitive with fossil fuels.

Electric vehicles are likely to replace internal combustion engines in the next few years. India needs a new integrated energy plan. Here, the Modi government has not succeeded in developing an energy policy to prepare for the energy transition. Niti Aayog’s draft energy policy is yet to be finalised even after several months of receiving feedback.

For all of the above reasons, while the UPA gets failing grade, the Modi government barely gets passing grade.