What the deregulation means for OMCs

More than the raise in petro prices, it is the decontrol of petrol prices and the phased decontrol of diesel to follow which has cheered the industry.

"What this means is that oil companies will get the freedom to price the two products in line with international prices. There will be periodic changes in oil prices, like it used to happen in 2002 (when prices were being revised every month)," said the finance head of an oil major.

“The fundamental changes that have been taken are more vital than the price hike,’’ said a PSU director.

Price sourcing
One is on operational efficiency. So, while oil marketing companies (OMCs) would be free to price their products (only petrol, for now) periodically, they would also be conscious of where to source their products.

“With this freeing of the refinery gate price of petrol, the marketing arm of BPCL may actually pay less to the refineries getting their petrol. They will have to work it out and all this will pan out in the course of the next few days,” said petroleum secretary S Sundareshan, after the meeting of the Empowered Group of Ministers.

Refinery gate price is the price at which the product is sold at the gate of refineries to the marketing arm of the company or any other at import parity price.

So, earlier the OMCs— Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — had to price their products on a formula dictated by the government, now the OMCs can price their products in line with the performance of their refineries and fix the retailing price, too.

Industry players say this move would determine how efficiently the refineries perform. “Till date, government-owned companies did not mind moving their products to various destinations at whatever cost they would incur. Now that the government will no longer subsidise, these companies will have to factor in the huge costs,” said an industry official.

And, refiners would start competing for evacuating products, and may start offering discounts as happens in other decontrolled products like fuel oil, naphtha and furnace oil.

Similarly, retail prices today are arrived at by adding freight, local duties and marketing margin to the refinery gate prices (a cost-plus formula). Going forward, the marketing margins for oil companies would be determined by its operating costs. There was little incentive to improve costs till now.

Long-run pluses
Essar Oil MD & CEO Naresh Nayyar said, “This move will benefit the consumer in the long run through competitive pricing of fuel products. ..We already have in place plans to increase significantly the number of retail fuel outlets that we have across India.”

ONGC chairman R S Sharma said the changes will have a positive impact on the company but it difficult to quantify the same right away. ‘‘It provides a long-awaited relief, removes uncertainty in business and provides comfort to investors,’’ he said.

Oil companies say there’s clarity now that the subsidy on kerosene and LPG will continue for a long time to come, and this will be supported by the government.

The industry is eagerly waiting for the details—what will be the new subsidy-sharing mechanism or how will prices of diesel will be decontrolled, and at what frequency petrol and diesel prices will be revised—-which could be announced next week.

What everyone is hoping for is that government doesn’t go back on decontrol this time.