The EGoM in its last meeting on August 8 considered the recommendations of Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertiliser but deferred a decision on limiting supply of subsidised LPG, official sources said. The panel is now slated to meet on September 16.

Sources said if approved every household will get only 4-6 LPG cylinders at subsidised price of Rs 395.35 in Delhi and they will have to pay market price of Rs 666 per cylinder for any requirement beyond that.

The limited supply of subsidised LPG would be for those who own a car, two-wheeler, house or figure in the income-tax list. Each 14.2-kg bottle of LPG normally lasts a household 45-60 days and based on this calculation a maximum of six cylinders are considered enough to see a family through the year.

At present, records of LPG distributors of public sector companies shows that a vast number of households are taking as many as 20 to 30 cylinders per household each year. This suggests that large scale diversion of subsidised cooking gas is taking place for use in commercial establishments, such as restaurants and dhabas and as auto fuel.

LPG for commercial use is sold at the market price and packed in different cylinders. Sources said limiting supply of subsidised LPG cylinders would help cut down losses that state-owned oil firms incur now on selling the fuel at government controlled rates. Indian Oil, Bharat Petroleum and Hindustan Petroleum lose about Rs 63 crore per day on selling domestic LPG below cost. The EGoM may also consider the revenue loss that state firms incur on selling not just LPG but also diesel and kerosene.

The three firms lose Rs 5.14 a litre on diesel and Rs 24.42 per like on kerosene. At current rate, they are projected to post a combined revenue loss of Rs 108,746 crore in the current fiscal. The EGoM, sources said, may decide on how this loss would be bridged. The government currently roughly half the revenue loss and another one-third comes from upstream firms like ONGC. The panel may decide if the current revenue loss sharing formula should continue or be altered.
Agencies

The panel was to consider recommendation of the Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertiliser. Sources said if approved, every household will get only 4-6 LPG cylinders at subsidised price of Rs 395.35 in Delhi and they will have to pay market price of about Rs 710 per bottle for any requirement beyond that.

The limited supply of subsidised LPG would be for those who own a car, two-wheeler, house or figure in the income-tax list. In the second phase, the difference between the current retail price and the actual market price will be paid directly to BPL cardholders. This would be delivered through the unique identification number, Aadhar, as it is commonly known.

For kerosene, the Task Force has suggested direct subsidy transfer to the poor and market prices for others. Sources said the EGoM was to approve launch of pilot projects to test direct transfer of cash subsidy to the targeted populations in few states.

Seven states — Tamil Nadu, Assam, Maharashtra, Haryana, Delhi, Rajasthan and Orissa — have been identified for launch of the pilot projects from October, according to the road map suggested by the Unique Identification Authority of India (UIDAI).
Agencies

Renjini Liza Varghese

All eyes are on this week’s Empowered Group of Ministers (EGoM) meeting headed by finance minister Pranab Mukherjee as it is expected  that there could be a decision on decontrolling of  diesel prices. If not fully, there could be a decision on oil ministry’s demand for a hike in prices of diesel and LPG. 

In June 2010, when the prices of petrol was de- regulated, it was believed that the prices of diesel, LPG and kerosene also will be decontrolled soon. However, there was no decision taken as diesel and LPG price deregulation could have spiraling effect on inflation. The country was trying hard to curtail inflation without having any adverse effect on the growth rate. 

Above all, diesel prices always remained a very politically sensitive issue. And five states went to polls in the last few months. With the results in favour of the UPA government, now it is believed that the government may take the bold step of decontrolling the diesel and LPG prices.

Current situation
According to the data available with the Petroleum Planning & Analysis Cell (PPAC) the under recoveries is Rs 14.66 on one litre of diesel, Rs 329.73 on cylinder of domestic LPG and Rs 28.28 on a litre of PDS kerosene.  In additionally government provides a subsidy of Rs0.82/ litre on kerosene and Rs 22.58 per LPG cylinder.

The experts are still divided about the government’s decision on decontrolling of diesel prices. The reasons they point out are a) the effect of diesel prices are wide spread, b) no pricing mechanism in place yet, c) OMCs will be the beneficiaries.

Negative effect, of decontrolling could be stated as below i) inflation can have a spiral effect as the transportation cost  will be increased ii) industrial production will be hit iii)companies which are dependent on diesel for power will also be hit which in turn can bring down the industrial output iv) the private players will enter the retail space in a bigger way which can take away the PSU share.  

 However it is assumed that the EGoM may take a decision on oil ministry’s demand for a minimum Rs 4 a litre hike in diesel prices and Rs 25 per cylinder increase in LPG rates. This can partly bridge the gap between domestic prices and their international cost.

Since 2010 June, the OMCs have raised the petrol prices nine times. The last was on May 15 2011 which saw the highest rate hike of Rs 5 per litre. 

Petrol Delhi Prices
May 15, 2011- Rs.63.37

Jan 16, 2011 – Rs.58.37

Dec 16, 2010 – Rs.55.87

Nov 9, 2010 – Rs.52.91

Nov 2, 2010 – Rs.52.59

Oct 17, 2010 – Rs.52.59

Sep 21, 2010 – Rs.51.83

Sep 8, 2010 – Rs.51.56

June 26, 2010 – Rs.51.43

It is high time that the OMCs need to have a proper channel to recover the losses. However, many of the experts, analyst and the economists feel that, this would not be the right time. The time when petrol was decontrolled was a better time as the government was pretty new, and also the crude prices internationally were at a lower level.

Empowered group of ministers (EGoM) chaired by finance minister Pranab Mukherjee  was scheduled to meet last week to discuss a possible increase in diesel and cooking gas prices. Oil marketing companies (OMCs) have been given freedom to set petrol prices but prices of diesel and cooking fuels continue to be fixed by the central government.  OMCs last month raised petrol prices by 5.6 per cent, but increasing diesel prices could have a broader inflationary impact as farmers and manufacturers pass their higher costs along to consumers. “We are trying to see there is no further price increase,” Deora told reporters.

“If (global) oil prices go up then something has to be done. But we are doing our best to see that essential commodity prices don’t increase.”
Global crude prices have rallied, and oil steadied to US $89.18 a barrel on Wednesday, after reaching a 27-month high of $92.58 on Monday.

Prime Minister Manmohan Singh’s coalition government, already weakened by orruption scandals, must seek to balance the benefits of more market-related pricing with the immediate impact on inflation, already spurred by rising food prices. Diesel accounts for one-third of fuel use and is crucial for transportation and the agriculture sector.

Tackling the structure of fuel subsidies would help stock investors value proposed share sales for state-run energy firms Indian Oil Corp and Oil and Natural Gas Corp. The political tussle over diesel pricing comes as India and Iran try to end a row over payments for Iranian oil supplies.

Iran has offered a stop-gap plan for supplies for January, but a lasting solution to the row over how to pay for future supplies may take weeks.

Deora said he expected a solution soon. India’s central bank said last week payments to Iran could no longer be done through a longstanding clearinghouse system run by central banks, prompting fears India’s US $12 billion annual oil imports from Iran could be threatened.

The Empowered Committee of State Finance Ministers, headed by West Bengal Finance Minister Asim Dasgupta, in its meeting earlier last month, decided to reconsider the demand to keep coal royalty out of the fold of GST.

“Non-coal bearing states in the country are opposing the move to keep coal royalty out of the purview of GST. Now, the empowered committee has decided to do a rethink on the demand,” an official source told Business Standard.

It may be noted that the empowered committee had assured Orissa finance minister Prafulla Chandra Ghadai at its GST meet on October 29 in Goa that coal royalty would be kept out of GST.

Since natural gas, which was included in the VAT (Value Added Tax) list, has been kept out of GST on the ground that it is used for generation of power, Orissa had argued that coal must also be kept out of GST. The state had pointed out that GST on coal would have a direct effect on cost of power.

At present, four per cent VAT is levied on coal. If it is included in the GST list, the effective rate would be 12 per cent, as both state GST and Central GST would be levied at six per cent each on coal.

Moreover, the state had demanded that the entry tax be kept out of GST’s ambit. The state government had categorically said it would not roll out GST if the entry tax was not kept out of the purview.

Every year, the state government earns around Rs 800 crore by the way of entry tax and Ghadai had pointed out that this tax should not be brought under the fold of GST. Meanwhile, no decision has been taken so far on the mechanism of settlement of disputes pertaining to GST.

It has been suggested by the empowered committee that a dispute settlement authority, chaired by a retired judge of the Supreme Court, be created for settlement of disputes. The Orissa government had suggested that this could be resolved by the GST Council itself.

The state had also suggested that the assessment and payment of compensation for loss to states on account of the rollout of GST could be done by an independent committee comprising members drawn from the GST Council and chaired by the Union minister of state for finance.

Business Standard

However many experts believe in the new year government will left with no option but to either deregulate diesel prices or at least  increase the prices.
Analysts say two other dominant themes loom before the industry in 2011: the latest auction of oil and gas blocks and the level of interest it generates, and a review of safety standards spurred by BP Plc’s oil well leak in the Gulf of Mexico.

Although inflation, at 7.48% in November, is still above the central bank’s comfort zone of 5.5%, the government may have little choice but to bite the bullet on the price of diesel, industry experts say.

In early December, the government raised the estimated under-recovery—the revenue loss to oil marketing companies (OMCs) from selling diesel, kerosene and liquefied petroleum gas (LPG) at below cost—in fiscal 2011 to Rs.65,000 crore, from Rs.59,000 crore pegged earlier.

Diesel is the biggest contributor to the figure, which was revised as the price of crude oil soared. Although crude averaged $78 (Rs.3,522) per barrel through 2010 till October, it breached the $90 mark last week for the first time since October 2008. When the government announced its decision to decontrol petrol prices in June, crude cost around $75 per barrel.

A part of the revenue loss to Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd is underwritten by the government and upstream oil companies such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd.
Although a subsidy-sharing formula is yet to be worked out by the government, Niraj Mansingka, oil and gas sector analyst at Mumbai-based brokerage Edelweiss Securities Ltd, expects the government’s share to be half the under-recovery amount, with ONGC and Oil India contributing 33% and OMCs absorbing the rest.
Mansingka expects the under-recovery for fiscal 2012, which begins in April, to touch Rs.73,000 crore, assuming prices of diesel, kerosene and LPG remain unchanged. Edelweiss has estimated the price of crude to be at $90 per barrel in fiscal 2012, and $95 in fiscal 2013.

The government’s fiscal deficit is pegged at around Rs.4.4 trillion in the fiscal ending March. “Even if the government doesn’t deregulate diesel, it would lead to indirect inflation as it would have to either borrow more or print more money to bridge the fiscal deficit,” said Dilip Khanna, a partner at international audit and consulting firm Ernst and Young who oversees the oil and gas practice.

Some analysts say the government may stop short of full-scale deregulation of the diesel price, but it may not be able to avoid at least a price increase, notwithstanding worries on the inflation front. Samiran Chakraborty, regional head of research at Standard Chartered Bank, says a diesel price hike may come as early as in the first quarter of calendar 2011.

“Though the government has got substantial revenues this year from 3G (spectrum) auction and through higher taxes, its spending has also gone up quite a bit,” he said. “With the potential of the subsidy bill (on account of under-recovery) facing the government, it would be constrained in not raising prices (of diesel).

Mint

“The meeting of EGoM has been tentatively scheduled for the afternoon of December 22,” a senior government official said.

With international crude oil having climed to near US $90 a barrel, the gap between domestic retail price and their production cost has widened, necessitating the review.

State-run Indian Oil Corp (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) currently sell diesel at Rs 4.71 a litre lower than its cost.

“The oil marketing companies are losing about Rs 75 crore per day on diesel sale and a view has to be taken on raising fuel prices,” he said. “Freeing of diesel price (from government control) is not possible at this juncture and at best a hike of Rs 1-2 a litre is likely to be approved.”

The government had on June 26 decontrolled petrol price and had decided to make diesel prices market-based in due course.

While petrol price has risen four times since then, diesel rates have remained unchanged. Another hike in petrol price by oil marketing companies is likely in a day or two to make up for the rise in crude prices.

The official said the three state firms lost Rs 11,153 crore in revenues on diesel sales during April-September this fiscal and without any change in price the revenue loss is projected to be Rs 36,540 crore.

IOC, BPCL and HPCL also sell domestic LPG and kerosene below cost and the combined revenue loss for the full fiscal is projected to be around Rs 65,839 crore.

The official said international crude oil (raw material for making petrol and diesel) prices were around US $72-74 per barrel in June when the government freed petrol price. Since then crude has climbed to near US $ 90 per barrel.

The June 26 decision had resulted in a Rs 3.50 a litre hike in petrol prices in Delhi.

At that time, the government decided to raise the diesel price by an ad-hoc Rs 2 per litre, even though the difference between the domestic retail price and imported cost of the fuel was almost twice of that.

Besides diesel, the oil retailers lose Rs 272.19 on the sale of every 14.2-kg LPG cylinder and Rs 17.72 per litre of kerosene.

The ministry’s decision will help R-Power set up new coal-fired power projects or use the excess coal for other projects. The coal mines, named Kerandari B&C in Jharkhand, can support 10,000 megawatt (Mw) of power generation. It is estimated to be the largest coal block in India and among the top three in the world, with reserves in excess of 1.2 billion tonnes.

The mining plan, approved by the government on October 29, allows R-Power to draw “The company will utilise 16 mtpa of coal exclusively for the Tilaiya UMPP and the balance 24 mtpa will be utilised or disposed of according to the conditions in the allocation letter,” stated the approval letter.

Tata Power, which had participated in the earlier rounds of bidding for the Sasan UMPP, had challenged a decision by an empowered group of ministers to allow R-Power to use excess coal from the captive mines meant for the Sasan project in Madhya Pradesh for another 4,000-Mw project at Chitrangi in the same state.

On January 9, the Delhi High Court rejected Tata Power’s petition to grant a stay or maintain status quo. Tata Power appealed the decision in the Supreme Court. On November 7, a bench comprising Justices G S Singhvi and A K Ganguly issued notices to 15 respondents — including R-Power, the ministry of coal, ministry of power and Power Finance Corporation — to file their replies within 12 weeks. The matter is posted for hearing again in January.

R-Power already has the largest coal reserves in India with over 2 billion tonnes. It is setting up three UMPPs, another 4,000-Mw capacity at Chitrangi and 1,200-Mw capacity at Rosa, besides gas, wind, hydro and solar projects.
It will produce 70 mtpa of coal from Indian mines to support 20,000-Mw capacity for 25 years and another 10,000-Mw capacity will be supported by coal from its three mines in Indonesia, R-Power Chairman Anil Ambani had said at a recent annual general meeting.

The mining plan for Tilaiya was submitted by R-Power’s special purpose vehicle for the project, Jharkhand Integrated Power, in August 2007. The Kerendari B&C coal blocks are located in the North Karanpura coalfields of Hazaribagh district in Jharkhand, which is about 30 km from a double-line track of Indian Railways. This will help R-Power transport coal to its projects in other locations. The mine received first-stage environment clearance in July.

R-Power is planning to use in-pit crushing and conveying technology to ensure reduced diesel consumption and lower operating costs. It will be the first mine in India to use this technology. Land acquisition has been initiated and site studies are in progress, said an R- Power executive.

Business Standard

It recommended allocation of 8 mmscmd gas for the 2,400 MW expansion project planned by R-Power at Samalkot, saying the project had environmental clearance besides “land, water and all other infrastructure facilities.” Also, it has executed EPC contract on July 21, 2010.

The ministry sought 4.48 mmscmd gas for the 1,200 MW project Torrent Power is setting up at Dahej SEZ in Gujarat, 0.4 mmscmd for 100 MW unit of Pandurang Energy Systems at West Godavari District in Andhra Pradesh and 1.62 mmscmd for 436 MW plant of RVK Energy at East Godavari District, also in Andhra Pradesh.

All the four projects, according to the power ministry, would be commissioned during the current XIth Five Year Plan period (2007 to 2012).

Sources said the EGoM did not make any allocation to any plant as RIL had informed that it cannot produce more than 60 mmscmd gas from KG-D6. All of the current output of 60 mmscmd from KG-D6 has already been allocated to urea manufacturing units, power plants, LPG units, city gas projects, steel plants and refineries.

More gas from KG-D6 would flow when RIL completes drilling additional wells in the eastern offshore field.