Exchange for oil futures mulled

Firms can now hedge their deals

The petroleum ministry has decided to have a commodities exchange for crude oil and petroleum products, while implementing the second generation of oil sector reforms.

The ministry is of the opinion that the opening up of the sector and the excess refining capacity in the country will lead to a greater import of crude oil and export of petroleum products. Such a scenario, it feels, merits a commodities exchange.

The exchange, which will be in line with the ones in New York, London and Singapore, will act like a shopping centre for crude oil and petroleum products. Although no physical transaction will take place at the exchange, it will facilitate hedging by Indian companies in their deals.

As per the rules of such exchanges, only those companies, which have facilities for the storage of crude oil and petroleum products, can be the members.

Petroleum Secretary BK Chaturvedi has asked the industry organisation, Petrofed, to prepare a paper on the new reforms, which should also ensure that petroleum product prices are not unusually high in far-flung areas once the freight subsidy is withdrawn.

Moreover, the working paper will also recommend measures to prevent cartelisation among oil marketing and refining companies and ensure that there is true competition among them, which will benefit the consumer.

The petroleum ministry has identified the northeastern states, Sikkim, Jammu and Kashmir, Himachal Pradesh, Uttaranchal, Andaman and Nicobar Islands and Lakshwadweep Islands as the "far-flung" areas eligible for freight subsidy for the supply of retail petroleum products. However, Assam has been excluded from this group.

The annual freight subsidy bill on this count comes to around Rs 1,000 crore. The finance ministry has been pressing for the removal of this subsidy and wants an alternative system to take care of any price spurt in these areas once the subsidy is eliminated.

The petroleum ministry has proposed that the subsidy should be implemented by concerned states and union territories by reducing sales tax to an agreed level. The loss of revenue to states and union territories on this count can be made up from the Budget, the ministry has suggested.

Betting on futures

• Higher import of crude oil and export of petroleum products merits a commodities exchange, feels the petroleum ministry.
• The exchange will act like a shopping centre for crude oil and petroleum products.
• The industry organisation, Petrofed, has ben asked to to prepare a paper on the new oil reforms.
• The paper will also recommend measures to prevent cartelisation among oil marketing and refining companies.