Govt needs to clarify whether it wants oil price control or exports

Commerce Minister Piy­u­sh Goyal was all smi­les when India achie­v­ed a record $422 billion in ex­ports in the April 2021-Mar­ch 2022 fiscal year. The country earned at least one dollar out of every ten from exports of petroleum products.

Perhaps this statistic was missed by some top government officials who, according to a recent report, war­ned private oil refiners about “excess profiteering”, accusing them of diverting gasoline and die­sel overseas while starving their retail outlets of transport fuels.

“The high growth in exports of petroleum products had a major role to play in India crossing its target of exports of $400 billion in 2021-22,” said Prahalathan Iyer, chief general manager, research and analysis, India Exim Bank. “India has the potential to increase its export share further and become the global leader.” With many European nations planning to phase out oil imports from Russia, there is a huge opportunity for India to intensify exports to the European region, he added.

India is already the third-largest exporter of petroleum products globally with a share of 7.7 per cent of world exports, according to Exim Bank. Petroleum product exports rose 9 per cent in the last fiscal to 61.8 million tonnes, 26 per cent of the total crude processed during the period. In value terms, fuel exports totalled $42.3 billion or 10.1 per cent of exports, according to oil ministry data. This was primarily attributable to a 79 per cent surge in crude oil prices, which averaged $80 per barrel last fiscal against $44.8 per barrel a year earlier, according to CRISIL Research.

Exim Bank and the comm­e­rce ministry peg petroleum exports much higher at $67.4 billion, up 161 per cent from a year earlier, and accounting for 16 per cent of India’s total merchandise exports of $422 billion. India’s top export destinations for petroleum products were Singapore with a share of 10.3 per cent, UAE (8.3 per cent), USA (7.6 per cent), the Netherlands (7.2 per cent) and Australia (6.1 per cent), Exim Bank data showed. Singapore, the UAE and Netherlands are re-export markets, from where the fuels are shipped to other countries.

“We expect a growth in petroleum product demand from the EU region, especially for diesel,” said Hetal Gandhi, director, CRISIL Research. “This is in line with the trend that has been observed since the escalation of the Ukraine crisis in February 2022, when a few private players increased overall diesel exports to the region, although reducing allocation to domestic retailers in tandem.’’

This reallocation has been influenced by the fact that state-owned retailers, which account for the bulk of the domestic market, did not raise pr­i­ces in tandem with global crude prices, making it diffic­ult for private pumps to do so.

“Domestic retail prices of petrol and diesel have not inc­reased in line with rising international prices leading to under-recoveries since Febru­ary for the entire fuel retailing industry, including our joint venture, Jio-bp,” Reliance said in its latest earnings report. “Under-recoveries adversely impact both existing operations and the appetite to invest in the sector.” Petrol and diesel price levels, before the latest duty cuts, were Rs 6-8 a litre lower than what it should be at current crude levels, industry experts reckon.

Domestic demand growth and margins are the primary factors that determine the balance between exports and domestic sales. Crude oil prices increased more than 10 per cent from Q2 FY2022 to Q3 FY2022, but retail prices of diesel increased less than 1 per cent. The lack of equivalent revision in retail prices incentivises private players to increase exports, Gandhi said. The only other option is to reduce refining runs, leading to lower output and job losses.

India was traditionally an exp­orter of garments, leather goods, gems and jewellery, and later IT services. The tryst with petroleum exports came after Dhirubhai Ambani set up one of the world’s biggest single-site refineries at Jam­nagar in Gujarat. At 68.2 million tonnes a year in capacity, Reliance transformed India into a major exporter of petroleum products.

State oil refiners account for only 10-19 per cent of total product exports, mainly lubricants, furnace oil and naphtha. Diesel and petrol produced by state refiners are supplied to the Indian market. The heavy lifting on exports is done by Reliance and the 20 million-tonnes-a-year Vadinar refinery of Russian Rosneft-run Nayara Energy.

Petroleum exports are important to India increasing its overall export pie, said V B Kasi, a seasoned commodities trader with stints in Sing­a­pore, US and Switzerland with COFCO and Noble.

In March, petroleum exp­orts were 11.4 per cent of Ind­ia’s total exports by value, up two percentage points from a year earlier, ref­l­e­cting the har­d­ening of oil prices and higher dem­and for fuels from Europe after the Ukraine conflict.

Overseas sales have surged after Russia, Europe’s biggest oil supplier, invaded Ukraine and the EU turned to countries such as India and China for fuel supplies. “Europe will remain the key driver for Indian product ex­ports,” said Prashant Vash­isht, vice-president of ratings agency ICRA. The prospects are bright this year due to low diesel inventories in Europe even before the war started, and with European traders and companies self-sanctioning Russia energy imports.

The future is even bright­er. India is taking impressive strides in transitioning towards a clean energy-based economy, which would greatly reduce the domestic consumption of petrol and diesel, Iyer said. The increased refining capacity, in the coming years, could actually facilitate the requirements of other developing nations who are not as fast in transitioning to cleaner modes of transport such as EVs.

Prime Minister Narendra Modi’s government has to make up its mind, at least as far as the oil sector is concerned, whether it wants reforms or control, exports or domestic supplies, market prices or state-set rates. It can’t have it all. That sends the wrong signals to investors.

The consequences of such confused messaging were felt in the lack of bidders for BPCL, forcing Delhi to abandon efforts to privatise the refiner. It would be wrong to argue that Covid-19 or climate change led investors to ignore BPCL when Japanese retail group Seven & I Holdings paid $21 billion in cash to buy US-based Marathon Petroleum’s Speedway gas station chain in Covid-struck 2020. BPCL’s market cap at current levels is less than $10 billion.

That also perhaps exp­lains why no new private refineries have come up in India since 2014. Plans by the Modi government for a 60 million tonnes a year capacity green-field plant in Maharashtra involving Saudi Aramco and UAE’s Adnoc never took off.

Rosneft and its partners paid nearly $13 billion for Essar Oil’s assets in 2017. The proceeds went to clear Essar’s debts to banks. After investing billions of dollars and providing tens of thousands of jobs, one cannot expect Rosneft and Reliance to produce and sell fuels locally at a loss.

Investors are already worried over arbitrary fuel pricing dictated by political compulsions. Questioning export credentials of private refiners by interfering in fuel allocations muddies matters further.