Bringing BPCL sale back on the table

Retail oil price reform through direct subsidy transfers should be considered

About a fortnight ago, Petroleum and Natural Gas Minister Hardeep Singh Puri said that the proposed privatisation of Bharat Petroleum Corporation Limited, or BPCL, was off the table. “We want to disinvest, but we cannot have a situation where there is only one bidder…For now, it is not on the table”, Mr Puri said on the sidelines of the 25th Energy Technology Meet in Mumbai. Endorsing such a stance, the Department of Investment and Public Asset Management also was reported to have stated that “owing to prevailing conditions in the global energy market, the majority of qualified interested parties have expressed their inability to continue in the current process of disinvestment of BPCL”.

While this decision has made it more difficult for the Centre to achieve its disinvestment revenue target during 2022-23, the reasons for postponing the sale of the government’s 53 per cent stake in BPCL are not just the market conditions or the absence of more than one bidder. What has also made the task of privatising BPCL difficult, if not impossible, is the policy environment that prevails in the country’s oil sector. Indeed, even when the markets improve, chances of a long queue of bidders for BPCL will remain dim without reforming the pricing policies that govern companies refining and marketing petroleum products.

Illustration: Binay Sinha

Remember that many governments in the past have tried to deregulate petroleum product prices, but those efforts have invariably failed to make a lasting impact on the sector. The worrying aspect here is that those steps created a notion that oil prices have been deregulated and the oil refiners are free to price them. But take a closer look at the last two decades or so and you would notice that there has been very little progress on this front. Oil prices are as regulated as any product in the pre-reform days of the 1970s and the 1980s.

It was in 2002 that the administered price mechanism for the oil sector was officially dismantled. This implied the abolition of the oil pool account and freedom to the oil companies to sell their products at a price determined by their own calculations on cost and return. Indeed, the state-owned oil companies, which used to dominate the sector, began revising their prices periodically.

True, the oil companies were declaring their prices almost every fortnight, but there was a catch. They could do so only after obtaining a tacit approval from the oil ministry. Moreover, the oil companies had no freedom to decide on prices on their own. The retail prices of different companies were almost the same and even the changes took place by a similar margin. This was a classic case of cartelised pricing, but few eyebrows were raised.

Worse, even that little freedom for the oil companies was gone after international crude oil prices began rising from 2004 and the United Progressive Alliance government decided to regain full control over prices of petrol and diesel. For five years till 2009, the oil companies had to do without that apparent freedom to fix prices. Things changed from 2010, with petrol prices being freed up and a few years later under the Narendra Modi government, diesel prices too were freed up.

But problems did not disappear. The government continued to have an indirect say on retail prices of petroleum products. Petrol and diesel prices would often be frozen through discreet suggestions from the government in the run-up to the general or Assembly elections. The government would step in to raise taxes when international crude oil prices would fall steeply to corner some of the gains for the exchequer and would roll back a part of the tax increases when crude oil prices would move northwards. Essentially, oil refiners and marketing companies never enjoyed the true freedom in pricing their products. Nor did the oil companies, as a result, develop a transparent system of fixing prices based on the cost of refining and the returns they could expect. 

Even the policy of allowing private-sector companies to set up retail network to sell petroleum products made little progress under these circumstances. A few companies did enter the retail business, but soon withdrew or downsized their operations, recognising that operating a retail network under a pricing regime that was virtually government-controlled was fraught with risks and problems.

In 2006, the government set up the Petroleum and Natural Gas Regulatory Board to protect the interests of consumers and entities engaged in activities relating to petroleum, petroleum products and natural gas, and to promote competitive markets. It was also mandated to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas. But so far the regulator has rarely been seen to be acting in the area of marketing and sale of petroleum products across the country.

In such a dismal situation, it is perhaps only proper that the decision on privatising BPCL has been put on hold. Any exercise of this nature should be undertaken only after removing the regulatory and policy gaps in the pricing and distribution of petroleum products, including petrol and diesel. That would ensure that even when the energy markets are volatile, the government would get a good number of bidders for acquiring BPCL.

Of course, fixing the regulatory and policy gaps in the pricing of petroleum products would be a big challenge, as all governments would always like to keep petrol and diesel prices under check to prevent their adverse impact on economically weaker groups of people. That is why reforms in pricing of petrol and diesel are talked about when international crude oil prices are relatively low and such plans are put on the back burner when those prices are elevated. At the same time, it is important to safeguard the oil marketing companies from politically motivated steps to freeze or bring down retail prices of petrol and diesel in particular. Such stability will also encourage the private sector to expand their retail operations in this sector and the idea of acquiring BPCL would become more attractive.

So, the way out is to grant full freedom to oil marketing companies to fix the retail prices in a competitive environment. Simultaneously, the government could declare a subsidised band of prices for petrol and diesel, just as it does for cooking gas. Consumers of petrol and diesel could pay the market price of these products, but their transactions should be captured through an Aadhaar-based system so that the consumers could claim the difference between the subsidised and market prices, if they so desired. The difference could be transferred to their bank accounts.

Such a system is already operational for the sale of subsidised cooking gas. There is no reason why it cannot be extended to petrol and diesel, perhaps along with some exclusion criteria based on income or assets. Since the difference would be reimbursed directly by the government to the consumers, the oil companies’ costs and returns would become more transparent. Inviting the private sector then for fresh investment in this sector, as also in acquiring BPCL, is likely to yield better results.