Taxes and subsidies: India’s oil policy

Abstract

India is the sixth largest consumer of oil. The country imports more than 70% of its crude oil requirements. Oil and gas account for 35% of primary energy consumption in India. The main processes involved in the petroleum industry are exploration, production, refining, marketing and distribution. Based on these processes, the industry is mainly divided into two segments; the Upstreamsegment consisting of companies involved in Exploration and Production process and the Downstream segment consisting of companies doing refining, marketing and distribution of petroleum products. The main companies involved in the upstream segments ONGC, ONGC Videsh Ltd., Oil India Ltd., Reliance, Cairn Energy, HOEC, Premier Oil. Whereas, the companies involved in Downstream activities are IOCL, Chennai Petroleum Corporation Ltd., Bongaigaon Refinery & Petrochemical Ltd., HPCL, BPCL, Mangalore Refinery & Petrochemical Ltd., and private players like Reliance Industries Ltd., Essar Oil Ltd. And Shell. Historically, oil extraction in India can be traced back to 1867 when oil was struck at Makum near Margherita in Assam. Oil exploration, refining and distribution gained proper foundation when Oil & Gas Industry was laid by the Industrial Policy Resolution, 1954. In pursuance of IPR, Government-owned companies Oil and Natural Gas Commission (ONGC), Indian Oil Corporation (IOC), and OIL (Oil India Ltd.) were formed. 1960s saw discovery of oil and gas by ONGC in Gujrat and Assam. Discovery of significant quantity of oil in Bombay High in 1970s opened up new avenues of oil exploration in offshore areas. By the end of 1980s, the petroleum sector saw steady increase in consumption whereas productionhad begun to decline. Domestic oil production could meet only around 35% of the domestic requirement. Further, the research shortage in early 1990s only compounded the severity of situation for Indian Government and forced it to go for the petroleum sector reforms to enable India to attract funds and technology from abroad into the petroleum sector. Government approved the New Exploration Licensing Policy (NELP) in March 1997 with the aim to ensure level playing field in the upstream sector for private and public sector companies in all contractual matters. In order to protect domestic consumers from volatile international crude oil prices, Administered Pricing Mechanism (APM) was used to control prices of petroleum products sold in domestic market. The prices of four main petroleum products – petrol, diesel, kerosene and LPG were regulated by this mechanism. However, in April 2002, APM was dismantled with a proper specification of mechanism to slowly reduce the protection on pricing of petroleum products. New regulatory regimes were introduced in downstream and upstream segment in 2006 to regulate activities involved in refining, marketing and distribution of petroleum products. At present there are 19 refineries, out of which 17 are in public sector and rest 2 in private sector are owned by Reliance Petroleum and Essar. For exploration, 212 blocks have been awarded under the seven rounds of NELP to both domestic and foreign companies. Distribution and marketing is being done by mainly four PSUs: IOC, BPCL, HP and IBP. The private sector consists of players like Essar, Shell and Reliance. Currently, Shell operates 68 fuel stations and Essar 1,240 while Reliance has reopened around 50 of 1,432 outlets it had earlier closed. One of the main issues in industry at present is that significant amount of cross-subsidy persists in domestic market and there is no statutory framework in upstream industry. The cross-subsidy has been prevalent due to inability of government to act mainly attributable to social obligations. The Indian market is expected to continue its growth in terms of domestic consumptions and poses possibilities of being used a refining hub.