Oil’s not well

IOC, BPCL and HPCL are listed companies. The non-government shareholders own 18 per cent, 33 per cent and 49 per cent of their equity respectively. The share price of these companies on March 31, 2004, was Rs 496 (IOC), Rs 478 (BPCL) and Rs 507 (HPCL). The BSE sensex was 5590. Three and a half years later on October 30, 2007, the BSE sensex closed at 19783. The share price of IOC was, however, down to Rs 467; BPCL to Rs 347 and HPCL to Rs 238.

I have done a crude calculation of the consequential loss to the non-government shareholders. It is around Rs 6,000 crore. Specifically, investors in IOC have lost Rs 361 crore; in BPCL, Rs 1,218 crore and in HPCL, Rs 4,006 crore. This is the nominal value of the erosion in their net worth. The opportunity loss is significantly greater. Had the share price of these companies risen at just 50 per cent of the rate at which the sensex rose during this period — in my view a conservative suggestion as they have monopoly control over essential products in a growing economy — the private shareholders would have been wealthier to the extent of around Rs 21,000 crore. To add grist to this grim picture, their closest private sector competitor, Reliance Industries, saw a quintupling of its share price from Rs 538 to Rs 2,770 during this timeframe.

The proximate cause for the underperformance of the shares of these companies is the reintroduction of ‘administered’ pricing. The government does not allow the companies to set the prices of petrol, diesel, kerosene and LPG in line with market prices. The companies are consequently currently losing Rs 3.90, Rs 6.22 and Rs 15.99 for every litre of petrol, diesel and kerosene sold respectively. And Rs 174.17 for every 14.2 kg cylinder of domestic LPG. The estimate is that they will ‘under recover’ (euphemism for loss) around Rs 70,000 crore over FY 2007-08. The reason they are not with the BIFR is because the government has provided them IOUs (oil bonds) and ONGC has accepted part of the burden.

The fact that the ‘navratna’ companies are being pushed to the wall is cause enough for concern. That it is being done so in a manner that suggests a cavalier indifference to good corporate governance is like adding fuel to fire. SEBI and the government have laid down norms for protecting the interests of the shareholders. The Competition Act for instance prohibits ‘predatory pricing’. But the oil companies all charge a common price and that is nothing but predatory behaviour. I have always wondered why non-government shareholders of HPCL, IOC, BPCL have not filed a PIL or taken judicial action.

The most disturbing aspect of the happenings in the oil industry is what it tells us about the nature of decision-making. There is not a bureaucrat, industry expert or perhaps even a politician who individually does not accept that the current policy is storing up a major crisis and that it would be unwise to bequeath a clutch of effectively bankrupt navratnas to future electorates. But at the same time there is a quiet acceptance that politics will always trump economics. This is a reality that exposes the fundamental weakness of our institutionalised decision-making structure.

We should realise that decisions are not the result of deliberations between civil servants and politicians in a careful duet of transparent liberal governance. It is the result of subjective preferences of a handful of individuals, some with constitutional authority, others without.

There is no doubt that were the government to pass on fully the sharp rise in the international price of oil to the consumer it would cause a backlash. Witness what happened recently in Myanmar. But we need not do that for the companies to recover their health. Consumers are already paying around $200 a barrel for petrol and $130 a barrel for diesel — when the price of crude is around $95 a barrel. The difference is largely made up by taxes. The government could, for instance, consider reducing their take. But this is easier suggested than done given the somewhat ‘siloed’ approach of the various ministries and the differing priorities of the Centre and states. But this may well be the only means by which the government can shield the consumer from the volatility of the international market.

Every democratic oil import dependent country is reeling under the current high price regime. But not every one has responded by pushing their national companies to the brink; or by jettisoning sound corporate governance. Most have developed mechanisms by which the burden is shared between the companies (cap on profits/margins); the government (reduction in taxes) and the consumers (a partial hike in prices). There has been protest but ultimately everyone has accepted TINA (there is no alternative). We have to find a similar mechanism.

The writer is chairman, Shell Group, India. Views are personal