Admonishing the export parity pricing model for fuel products, Oil Minister, Veerappa Moily told CNBC-TV18 that if adopted this pricing model would lead all refineries in to red and no new refineries would come up.
It must be noted that just a month back Finance Minister P Chidambaram had strongly stated that oil marketing companies will get only Rs 20,000 crore from the government and Rs 60,000 crore from upsteam companies. However sudden depreciation in rupee is likely to severely impact OMCs under recovery.
Moily stressed that he had raised concerns relating to export parity pricing to the Prime Minister Manmohan Singh. " Prime minister having intervened and Kirit Parikh committee being constituted, the recommendation of the Kirit Parikh committee will have weightage," Moily said. However he added that if Kirit Parikh Committee also recommends going for export parity pricing then refineries will be the biggest losers.
Kirit Parikh Committee report is expected in two-three month. Moily argued that export parity pricing is not suitable for India as the country meets 80 percent of its fuel requirement through import.
"If you want to make it only 100 percent export then the companies will go red, almost all the refineries will go red, and no new refinery will come up," Moily said.
Below is the verbatim transcript of Moily's interview
Q: Let me start by asking you about the impact of the depreciating rupee and as far as global crude prices are concerned, there was relief on that front because global crude prices have been coming off and have been stable between USD 102-104 per barrel but the depreciating rupee has offset all the relief that you enjoyed on account of the fall in global commodity prices. We have been speaking with oil marketing companies (OMCs) and they are clearly worried at this point in time about the impact, what is your own assessment of the rupee’s impact as far as the under-recovery is concerned?
A: It is a matter of great worry and the worst hit are oil companies. We have to stabilise this because now by every rupee depreciated, all companies put together we lose about Rs 9,000 crore. It is a disaster. We need to address it. Hopefully I think within two-three days time, rupee will stabilise.
Q: Have you had any conversations with the finance ministry on the possible options because you are clearly one of the most impacted parties, has there been any conversation with the finance ministry on what the repercussions of depreciating rupee could be, how oil marketing companies could be spared?
A: Yes we are in constant dialogue with them. That is why I am now reassured that within two-three days time, rupee will stabalise.
Q: What is the basis of that reassurance?
A: I think the Reserve Bank of India (RBI) can do some mid-course corrections, and the number of measures government has taken particularly on attracting foreign institutional investors (FIIs) and also the foreign direct investment (FDI) would also help. The investors’ confidence will rise. Once the investors’ confidence rises then possibly the rupee will stabilise.
Q: You are saying that you have been given an assurance by the finance ministry that steps will be unveiled within the next week or so that will perhaps boost foreign investor interest into the country and hence stabilise the rupee so you have been given that assurance because that is the sense that we are getting as well?
A: Ultimately, the fundamental of the economy of this country is still strong. To be very frank, this is only an aberration which can take place from time to time. For which at sometime we must have a structural change with regards to certain financial policy, but at the same time, nothing can substitute particularly for attraction of the FIIs and FDIs and also inspiring the confidence among the investors.
Q: While what the government finally does in terms of FDI cap for bringing in more FII money into the market is a separate story but if we see the volatility in the rupee continue, what is the likely impact as far as the subsidy is concerned. Rs 80,000 crore is what was earlier estimated, oil market companies saying already that the subsidy has gone beyond Rs 1,00,000 crore, if this trajectory for the rupee continues, how bad is it likely to be?
A: The under-recovery will increase. Again we have the problem, the finance ministry wants export parity price and we want trade parity price, which was in practice. Last year’s under-recovery has been reimbursed by the finance ministry.
Q: Export parity price?
A: No, I am not agreed on that.
Q: Finance ministry believes that a decision has been taken as far as export parity is concerned?
A: Now fortunately, the prime minister intervened. In the presence of the finance minister, I presented, by that time I had already appointed Kirit Parikh Committee then I told the finance minister that you go through the reference which we have made and you can have your representatives in the Kirit Parikh Committee. Now the proposal has come from them. They want that export parity matter should also be included in their terms of reference. So Kirit Parikh Committee will look into it. Yesterday we constituted the committee and revised the terms of reference and maybe that of course we want the report to come within two months, possibly two-three months time, the report will come thereafter we will go in for that. That will address the under-recovery question.
Q: Let me talk about the under-recoveries and Kirit Parikh report is still as you yourself pointed out two-three months away, the finance minister has made it very clear, he has categorically stated, I am not going to give oil marketing companies anything more than Rs 20,000 crore, Rs 60,000 crore will come from upstream companies, I will only give Rs 20,000 crore. If your under-recoveries continue to move in the trajectory with the depreciating rupee, are you going to be able to convince the finance minister?
A: I think you are only reiterating the statement which is made by the finance minister before prime minister intervened in the matter. Prime minister having intervened and Kirit Parikh committee being constituted, the recommendation of the Kirit Parikh committee will have weightage. Whatever Kirit Parikh committee recommends I am prepared to go for it.
Q: Hypothetically, if he three months down the line says export parity is the way ahead, will the oil ministry agree?
A: You must know the history of this parity prices. Rangarajan Committee, Kirit Parikh Committee, all these committees had recommended trade parity. Because, what is our export. 80 percent we are importing, not exporting. When we were importing, the formula was 80 percent import price and 20 percent export price that is how the combinations were done. If you want to make it only 100 percent export then the companies will go red, almost all the refineries will go red, and no new refinery will come up.
Q: But you presented this argument even to the Finance Minister and the Prime Minister. In his assessment if Mr. Parikh and his panel were to propose moving towards export parity will you accept the recommendation?
A: I don't think anybody can give you a report bereft of the facts available on the ground in India.
Q: Are you saying there will be a compromise formula that Mr. Parikh will be able to broker together to make peace between the Finance Ministry and your ministry?
A: He is not meant to broker the proposal between me and the other.
Q: That is what it seems like.
A: No he will independently objectively judge on that. I am just telling you whatever recommendation he makes we will abide with that.
Q: You yourself pointed out that the terms of reference for the Kirit Parikh committee have now been expanded, he is not going to look at only the issue of export parity or trade parity, he is also going to look at the issue of subsidy sharing formula. In my conversation with Kirit Parikh a couple of weeks ago he said that he believes that the current subsidy sharing formula is flawed, the current subsidy sharing formula is not an efficient formula it requires change. Do you believe that as well, do you accept that?
A: I am just telling you that is why we are referring to him. Oil Ministry took the initiative to refer the issue to Kirit Parikh.
Q: So you believe that the subsidy sharing formula today as it exists is not efficient, it is flawed?
A: No that is one of the arguments. I am neither supporting it nor opposing it. This is a question better Kirit Parikh examine and solve these things.
Q: What would you like changed about the subsidy sharing formula?
A: Let him examine and give the report. I am not going to prejudge the issues which will be decided by Kirit Parikh.
Q: Do you believe that we will have a new subsidy sharing formula in FY14?
A: That depends on Kirit Parikh’s recommendation.
Q: And you are expecting that report in the next two-three months?
A: Yes, let it come.
Q: I want to go back to the issue of what happened on the under recovery front. You have done a very bold move by actually being able to hike diesel prices every month. Nobody believed that the government would be able to bite that bullet, nobody believed that you would be able to carry forward with a monthly revision but this government has stuck to the course. Now under recovery on diesel because of the rupee depreciation has gone above Rs 6 a liter. Will you allow oil marketing companies (OMCs) to go beyond that 40-50 paise band that the government has as of now said is the band that OMCs can hike prices by for diesel?
A: At the present no. The present steep depreciation in rupee is a temporary phenomenon. I don't think that is going to stay.
Q: So you are firm in your resort to wipe out diesel under recoveries which means that you will continue to hike diesel prices every month?
A: Yes correct. As of today no change, the elections will not change anything because ultimately we have to run. I cannot tell my petrol pumps to go dry. Ultimately we have to increase and the people have accepted. This is a basic reform which we had to do and we have done.
Q: I want to talk to you about the Rangarajan Committee report on gas pricing. Practically every week you say that you will take the matter to cabinet yet we haven't seen this matter being taken to the cabinet.
A: This is not a question of going, that is a matter of past. We have already taken it up with the cabinet, Cabinet Committee on Economic Affairs and there are few things where we need other clarifications from the finance and planning commission. That has gone, may be today tomorrow we are getting back and I am confident next week the committee (interrupted)
Q: What kind of clarifications are you seeking from the Finance Ministry and the planning commission?
A: There are certain modifications we have made after the comments came from Finance Ministry and planning commission and their PMO felt that we need to get clarification from both Finance Ministry and planning commission. We are getting it, as soon as it comes we will formulate and if necessary revise the cabinet note and send it to them and PM is very particular that this has to come to the cabinet as early as possible.
Q: So you are saying perhaps as early as next week?
Q: Which means that you are accepting Mr. Rangarajan's recommendations as far as gas pricing is concerned? Are you accepting the formula that Mr. Rangarajan has put forward for gas pricing?
A: Insofar as the Petroleum Ministry is concerned Petroleum Ministry is anxious to accept the recommendations of the Rangarajan Committee for the 12th Five Year Plan.
Q: By when do you think that we are actually going to move to Rangarajan Committee's formula as far as gas pricing is concerned if this matter does to go cabinet as early as next week?
A: Wherever the contractual obligations are there the old rate will continue, contractual rate will continue. This will come for the fresh cases and also the future cases.
Q: The disagreements between the Fertiliser Ministry's view, the Power Ministry's view on what will actually happen if gas prices move up and the kind of subsidy burden that will be inflicted upon by the government, all of those issues have been resolved?
A: Definitely the Power Ministry and the Fertiliser Ministry definitely want the present rate cut to continue, but at the same time you must know that we have not gone strictly by Rangarajan Committee to that extent. We are also around USD 6.7, not more than that which the Fertiliser and Power Ministry also subscribe to.
Q: So you are saying that you are accepting a gas price which will result in gas prices moving to about USD 6.7?
A: I think it may ultimately.
Q: It will not make the companies particularly happy, because they were talking in excess of USD 8?
A: No, the companies want some clarity. They should know when they come and invest what will be the price they are getting. Rangarajan has left the other things open and he wanted that thereafter it has to move in a certain roadmap. That is why we have requested Dr. Vijay Kelkar Committee to go into this and that will come into effect by the end of this five year plan, that means 13th Five Year Plan. That will be the formula which will come into effect.
Q: But is there now agreement on USD 6.7 between all ministries including Power, Fertiliser, Finance and yourself?
A: I cannot say there is a consensus. There cannot be a consensus.
Q: But you have managed to convince them that this needs to be done?
A: Let us see. This has to go to the cabinet now. We have to have a reasonable rate. At the same time not exacerbated. But the question now is that we need to motivate the investors. When there is no gas available at all where is the question of subsidy or any other thing and we have to import. Import will be at more than USD 14 and means to say that will double or treble the indigenous gas which we are going to determine. That means to say that definitely the indigenous products are much, much better than the import price.
Q: The gas production has fallen to almost an all-time low at this point in time. Do you believe that once you do give the go ahead as far as this particular matter is concerned you are likely to see an improvement?
A: This is the sense of the market that no sooner we implement Rangarajan Committee and also prepare a roadmap for future beyond the 12th Five Year Plan as enunciated by Dr. Vijay Kelkar, this will improve the situation.
Q: Is that the assurance that most companies have given you?
A: Yes, most of the companies.
Q: The other matter which is pending government approval and that is the gas allocation matter that has not been resolved so far. Again there were differences between the power ministry, fertilizer ministry, where do things currently stand as far as the gas allocation policy is concerned?
A: This is a matter which we had actually listed on May 28. The comments from the fertilizer ministry and also the finance ministry had not come. We are waiting for that. I would like to hassle this process because it has been going on since very long time. I am expecting these ministries to send the recommendation. We would like to fix up the meeting either next week or thereafter.
Q: Is there likely to be parity between the power sector and the fertilizer sector as far as gas allocation is concerned?
A: That is the proposal.
Q: Are you going to push for that?
A: The power ministry has a lot of pressure. 20000-25000 megawatt of gas based power plants are idle today. They are not getting gas because the priority is only for the fertilizer. They don’t get any gas altogether. That is why somewhere we have to move fast on this.
Q: Do you anticipate that along with the decision on gas pricing, a decision on gas allocation is also likely before the end of June?
A: I think so.
Q: Both these matters before the end of June?
A: Yes. The power minister is not here, he has gone abroad I think. He will be coming only after June 20, as soon as he comes this matter will be taken up.
Q: What about the disinvestment programme because the finance ministry has of course laid out an ambitious target as far as disinvestment is concerned. Some of your oil companies are also likely to be a part of that disinvestment programme...
A: We are on schedule as far as Indian Oil Corporation (IOC) is concerned.
Q: When is IOC likely to be done?
A: We are ready but it is for the finance ministry to call for a meeting and schedule it.
Q: Do you have a broad timeline of when you think IOC will hit the market?
A: We are ready. It is for the finance ministry. There is always a timing which will be determined.
Q: I want to talk to you about something very curious that happened just sometime ago and that was the issue with Oil and Natural Gas Corporation (ONGC). We were told that the deal has been struck and then very shortly that deal was withdrawn and we don't know whether that deal will be done, won't be done. It must have been fairly embarrassing for you and your ministry as well?
A: When I saw the news it also embarrassed me. Then I spoke to the CMD of ONGC, the thing was our team is there in Mozambique. They were expected to meet the minister and then make an announcement. I think they hurried up. It was a premature announcement.
Q: Is that deal tied up, is it done?
A: I think it has been tied up.
Q: So, is it likely to be announced anytime soon?
A: My sense is yes.
Q: There was no other hold up on account of that?
A: We can't call it as a goof-up. It is only a tactical error.
Q: What about the other deal that everybody has been talking about again involving ONGC and the Kazakhstan oil block. What are you being told as far as that is concerned?
A: We are seriously going into that. Cabinet has already taken a decision and we are competitors with China and hopefully we will succeed.
Q: By when do you expect that there will be clarity on whether it will go our route or China's route? Are you using the ministry of external affairs to also make your case and try and ink this deal?
A: Hopefully that deal will be through.
Q: You keep talking about wanting to attract investors into this sector. The fact of the matter is that over the years this sector has been a beleaguered sector. Foreign investors have lost faith in this sector because of the various changes – the way the policy was rolled out and then policy was rolled back specially as far as the tax incentives were concerned. You have said on record that you would want the next New Exploration Licensing Policy (NELP) round to be bigger and better than all the previous NELP rounds. Do you believe as things currently stand in the country, with growth rates having come off so significantly, with this air uncertainty, with an election down the corner that investors are really going to be interested in putting this kind of money into India in the oil and gas sector?
A: All that apprehension is over. Now things are moving fast. 1999 NELP sectors have commenced. There is a big jump on the sedimentary exploration. Unfortunately there were some projects which were pending because of the defence problem. I have proved to the Prime Minister and also the committee on investment that defence projects can co-exists with exploration. I could prove that. As a result of it I think 90 percent of the projects have been cleared now. Now everything is on the way.
Q: While what you say is correct that CCI was brought in to sort out issues between the ministry of defence and your own ministry and a lot of progress have been made on that front. However when you speak with companies individually and they are still writing letters to you saying that some blocks should still be considered no-go blocks because we cannot deal with the kind of conditions that the ministry of defence has laid and these are companies like Cairn etc?
A: That is a matter of past. Now they are also enthused because 90 percent of those obstructions have been melted away and only 10 percent is remaining that is also we are going to sort it out. Mining lease area we have cleared that is why you find now Barmer, Kakinada – the oil is now found, the activities are on. They have already deployed the rigs for the exploration of this. Many of the other things also we have cleared, there were 1 to 3 years some of the management council resolutions - minutes have not been signed. Our secretary sat for one month completely - even Saturday and Sunday, we cleared all those things which were pending. We have cleared numbers of things. What was once called that in Rajasthan – Barmer and other areas no oil is available – today I must tell you the largest reservoir is available, largest contribution for the oil is coming from the Rajasthan area. Rajasthan government was getting Rs 500-600 crore per annum. Now they are getting Rs 4000-4500 crore.
Q: There were still concerns that Vedanta had raised, they had written to the Prime Minister several times, written to your ministry several times seeking speedy clearances etc. Are you saying that all clearance related issues have been sorted out?
A: Many of the clearances have been given. Some of the clearances are on the way. The process takes its own time, we have curtailed it. It used to take 38 months, now within 5-6 months we have ensured that processes are curtailed and we are going ahead.
Q: The apprehension is that the government is fearful of taking a decision hence this business of setting up one committee after another committee after another committee. You are assuring people who are watching this show today that as far as gas related issues are concerned whether pricing or allocation there will be a decision by the government, by the cabinet perhaps by the end of this month and as far as moving to export parity, as far as subsidy sharing mechanism and the change possibly of the subsidy sharing mechanism – 2, 3 months time it will be done?
A: Yes. Our shale gas and Coal Bed Methane (CBM) policy will come about within 20 days time.