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BPCL privatisation faces bigger obstacles than Air India sale. Here's why

BPCL privatisation faces bigger obstacles than Air India sale. Here's why

Air India | Air india privatisation | BPCL

Krishna Veera Vanamali  |  New Delhi 

The privatisation of Bharat Petroleum may hit a roadblock due to high fuel prices due to a rise in global crude oil prices.

The price of global benchmark Brent crude oil has risen 13% in a month to $85 per barrel, its highest level in seven years.

A senior oil ministry official told Business Standard that state-run oil marketing companies were currently taking a hit on sale of petrol, diesel and LPG and expected to recover losses when oil prices would soften later. The fuel retailers are losing about Rs 100 for every domestic LPG cylinder sold.

Indian Oil, Hindustan Petroleum and Bharat Petroleum adopted a daily price revision mechanism in June 2017 to pass on the impact of international oil prices quickly.

But an official said the full impact of the recent surge in crude oil prices was yet to be passed on to the consumers by oil companies.

State and central taxes account for a major part of petrol and diesel prices in India.

As on October 16, when petrol was sold at Rs 105.49 per litre in Delhi, the cost excluding taxes was Rs 44.37 per litre. Customers are paying more than twice the cost of the auto fuels due to high taxation by both the Centre and states.

Even though petrol and diesel prices have been officially deregulated, the government nudges the three refiners under its control to keep prices under check.

Under the current pricing structure, the oil companies are bearing a loss with their existing marketing margin of Rs 3-4 a litre getting squeezed.

The new owners of will not like a scenario where they have to adhere to these unofficial price regulations to remain competitive.

We spoke to former chairman and managing director of Oil and Natural Gas Corporation (ONGC), R S Sharma about the challenges facing the privatisation. Highlights of his response:

  • The 3 state-run OMCs support govt’s pricing policy
  • Firms unable to fully pass on higher crude oil costs
  • Oil prices were stable and low when sale was announced
  • The price can cross $100 per barrel soon
  • How can a private company participate in underrecovery?
  • Govt should delay privatisation, wait for stability in oil markets
  • sale took several years, Pawan Hans yet to find takers
  • much bigger, complex company than Air India

If public sector OMCs are not allowed to freely change prices when oil prices continue to soar, BPCL finances will take a hit after it changes hands. The company has a network of 18,768 retail fuel outlets.

To understand this, let us imagine a scenario where there is a further surge in oil prices after BPCL is privatised. The government cannot ask a private company to absorb losses to minimise impact on consumers. But if it asks Indian Oil and HPCL to do this, BPCL will have no option but to reduce its prices. Else, customers will flock to cheaper options like Indian Oil and Hindustan Petroleum.

Not just this, the new promoters of BPCL will also be mandated to follow official pricing regulations concerning LPG, as the government wants to keep regulating it. The company’s BharatGas division had a 26.5% share of the LPG market as of June 2021.

If the government wants to keep prices under control, it has to look at reducing its excise duties.

The central excise duty collection on petroleum products jumped 74% in FY21 to Rs 3.36 trillion, compared to Rs 2.35 trillion in FY20. It is on track to touch Rs 4 trillion this financial year.

Investors will not look favourably at the privatisation process if the government intends to shift the burden on to the private owners after Bharat Petroleum is sold. The government may have to make concessions which could be politically sensitive. BPCL’s buyers may seek a commitment from the government to ensure that free market pricing is followed by all fuel companies.

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First Published: Mon, October 25 2021. 10:05 IST