Indian Oil Corporation (Indian Oil), the nation's largest fuel retailer is working with Indian Railways on a proposal to cut down the transporter's mammoth fuel bill through a review of its diesel procurement practices. The proposal by the railways includes importing crude oil and procuring refining capacity from Oil Marketing Companies (OMCs) on lease and cutting down diesel inventories by a third to mere five days.
"We want to cut down our total diesel bill from around Rs 18,000 crore last financial year to Rs 16,500 crore this year. With that objective in mind, we are trying to work out a few ideas - sourcing crude on the High Seas basis, seeking refinery capacity for our use, and even cutting down inventory costs at the Railway Consumer Depots (RCDs)," a senior rail ministry official said.
Business Standard was the first to report on March 4 the railway plan to review diesel procurement processes over zonal units as part of a larger reform drive. Railways has also floated a tender for selection of a consultant to identify alternate procurement strategies enabling the transporter to procure diesel at market linked prices.
"These may include but are not limited to High Seas procurement of either diesel or crude (feasibility, taxation, logistic and process aspects, optimum nature (such as blocking refining capacity) and period of contract for improving price discovery with the Oil Marketing Companies (OMCs)," Indian Railway Organization for Alternate Fuel (IROAF) said in its Expression of Interest. High Seas procurement refers to a mode of transaction where the buyer sells his consignment to a third party during transit.
A senior IOC official confirmed the development and said discussions have been going on for quite some time - on railways proposal to pay tolling charges to IOC for the refining capacity to be booked -- and are yet to be finalized. He said IOC has set up a Joint Working Group of officials along with railways which is looking at the proposal and working out the modalities "in right earnest".
Some of the issues that need to be sorted out include the offtake. "The Railways can give us guaranteed offtake of diesel for their requirement if refinery capacity is booked as per plan. But what about other petroleum products which will be produced apart from diesel?" Besides, the railways procure diesel from oil companies at multiple locations across states. "The changed scenario may require modifications in inter-state transport of the fuel which would give rise to taxation issues.
We plan to talk to the state governments on this subject," the IOC official said.
Indian Railways consume around 2.8 billion litre diesel annually at a cost of RS 18,000 crore - around 18% of Net Ordinary Working Expenses. The procurement price is governed by a rate contract settled through an open tender by the railway board. Through the contract with the OMCs, which is valid for a year, zonal railways place diesel orders on OMCs for supply at RCDs. The RCDs are built by OMCs but railways provides commitment to buy diesel through them for a fixed number of years. The depots maintain at least 7 days of inventory on an average, the cost of which is borne by railways.