Slipping On Oil And Gas
Why India’s Oil PSUs Will Be Losers
Rajya Sabha MP Mani Shankar Aiyar recalls how tough it was to get the late Subir Raha, who was ONGC chairman when Aiyar was petroleum minister from 2004-06, to accept that Reliance Industries’ drilling performance, particularly offshore, was far superior to ONGC’s. Also, he wouldn’t admit to any deficiency that, as a PSU, ONGC needed to plug to improve India’s self-reliance in hydrocarbons. “He was adamant this wasn’t the right way of looking at ONGC’s performance and entered a huge bureaucratic battle on its targets,” says Aiyar.
The government would have everyone believe that the public sector ONGC and Oil India Ltd (OIL)—and not Reliance Industries—will be the major gainers from its controversial decision to double the price of natural gas from April 2014. The idea is that a higher gas price will encourage exploration and reduce the fuel shortfall. It contends that, though the private sector will benefit, the two PSU explorers will also gain as much as Rs 8,000 crore in revenue. But experts Outlook spoke to disagree.
The reality, they say, is different. The heavy subsidy burden they help the government meet leaves the two PSUs struggling to get a cost-plus price for their produce. Both profits and production figures are slipping (see graphic). Over a decade, ONGC’s oil production has dipped from 26 million tonnes in 2004-05 to 23.7 million tonnes. Gas production has only risen marginally. oil, much smaller that ONGC, has seen oil production rise to 3.8 million tonnes and gas to 2.6 billion cubic metres.
“Ultimately, it’s the nation which is the loser, as the ONGC, one of the best companies and a big employer, is being damaged,” says a former top bureaucrat. Earlier this month, both PSUs had approached the petroleum ministry to seek a review of the non-transparent subsidy policy, which ensures that much of their revenues go towards paying for the under-recoveries of oil marketing companies that supply subsidised diesel, kerosene and cooking gas. Such opacity has seen the worth of the ONGC and OIL (both are listed) considerably eroded. “They are blue-chip companies, but their shares are getting impacted,” says S.P. Tulsian, an investment advisor. He adds that the net realisation value of ONGC, in particular, is constantly falling in dollar terms, though in rupee terms they remain constant.
Planning Commission member B.K. Chaturvedi agrees that the heavy subsidy outgo poses a problem for the PSUs, especially with the cost of exploration going up. On possible gains from the gas price hike, he says there are too many loose ends. “We don’t know what the increase in cost of fertiliser will be. We don’t know how the oil prices will behave. If oil prices come down, the subsidy burden will be less, but if it goes up, we will definitely have a huge subsidy bill, Given the investment requirements, it does create problems,” he says.
Whether it was because of pressure, malpractice or lack of planning, ONGC came through poorly in the cag’s performance audit last year. This year too, it has been questioned on imprudent hiring of a rig—which wasn’t used—from Reliance. “There are management issues, besides the ONGC and OIL being treated like cash cows. They need to get into the field to find more reserves and monetise them—which they are working on,” says Santanu Saikia, editor of Indiapetro.com.
While private firms were brought in to improve investment and technology flow to boost production, somewhere the need for technology transfer to strengthen the PSUs was forgotten. Rao cites the case of private sector consultancies for oil fields in Panna-Mukta- Tapti, Ravva and Kharsang, where technology transfer to ONGC and OIL was a must. “This has never been enforced. No review, including that by CAG, has highlighted this lacuna,” says Rao.
If everyone knows what the problems are, then who is to blame? Former petroleum secretary S.C. Tripathi is blunt: “ONGC suffers from poor management, and tedious and slow decision-making. The lack of leadership from within ONGC and from the ministry which is anchoring it is to blame for the present state of affairs.” And an important question: Who gains from this?
>> They are the national wealth. If there is one and only good thing that the Nehru (the first PM of India)did to india, it is his initiative in creating PSUs
First, national wealth translates into no one's wealth. If you think India was better off under Nehru and his PSUs as against Reliance then use all your energy in fixing the PSUs. I agree with you that PSUs have done some good things and are necessary in some cases. But once private companies like Reliance are there, government should quit.
>> If there is one and only good thing that the Nehru (the first PM of India)did to india, it is his initiative in creating PSUs.
Quite the opposite.
I don't blame Nehru too much for it. He thought of Russia as a model, and at that time, Russia could be considered a success story. Plus, instead of a vibrant private sector, we had a few industrial houses. So, PSUs probably had some role.
The problem was not with establishment of PSUs itself, but with making the monopolies, discouraging private enterprise, and getting civil servants, instead of professionals to run them.
What Is In a Name >> And privatization is an option to be considered.
If the PSU is not a monopoly, privatization is worth considering. NDA govt did that. But the problem is -what is done with the proceeds of privatisation. NDA had a good Highwayb uilding program. The money earnt by selling Modern foods and Hindustan Zinc went to that. But what about UPA - UPA is privatizing by stealth selling PSU shares to LIC. And the money is wasted in all those freebies.
We need a law that ensures taht any money got from PSUs should be used to build public assets only. Not spent on freebie programs defined by SAINT SONIA and Gang.
Rajesh >> No matter how water tight laws are and foolproof implementation, PSUs will always be guided by politics, not economics. Government's business is not business. Here is an old saying (hindi) - jiis desh ka raja vyapari, oos desh ki janata bhikhari.
With Due regards to what you said, Allow me to strongly disagree on one part of your view. PSUs were built out of hard earned public money - of all castes, communities and regions in India. They are the national wealth. If there is one and only good thing that the Nehru (the first PM of India)did to india, it is his initiative in creating PSUs.
Agree that politicians have potential to destroy PSUs and see how UPA has decimated Air India, BSNL and all set to decimate ONGC as well. But that does not mean we dismantle these things. Rather, why not treat PSUs as like our Central Electoral Commission? Free them from control of ministries. Let there be parliamentary supervision. let ministries have decision on how the PSus should invest for greater economic growth. But that should be the end. Meaning - the day to day functioning of PSus should be strictly by professionals who should have the only objective of austerity and maximal efficiency. In other words' - PSU assets and cash should not be used to help politicians.
All this is not impossible . Also a profitable PSU is always going to help Govt in terms of high dividends and increasing non tax revenues. But last 9 years, the opposite has happened, Govt has destroyed PSU after PSU. The only positive acheivement of Nehru dynasty rule isnow being nullified. Tragic !!
>> No matter how water tight laws are and foolproof implementation, PSUs will always be guided by politics, not economics
Doesn't make it right. The justifications you were providing earlier remains pathetic.
And privatization is an option to be considered.
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