Energy Crisis - Part 2
This is an interview with Subir raha former Chairman of ONGC which was done by CNBC TV18 on 9th of may.
You can read the actual interview at:
http://www.moneycontrol.com/india/news/business/oil-subsidy-sharing-formula-decided-arbitrarily-subir-raha/16/23/337459
Copy pasting the same interview here...
Q: What you think about ONGC subsidy-sharing bill because our estimates are it could go up as high as Rs 50,000 crore. Is it likely that ONGC has to dish out such a large subsidy-sharing bill and do you see that 33% subsidy sharing formula being tweaked as well, the way crude is behaving?
A: Firstly the formula is purely an arbitrage decision, so 33% or 65% is anybody’s guess because there is no logic in working out these numbers. As far as ONGC or any other company is concerned, there are two major risks involved. One, is the financing for the exploration investments that always exists in the balance sheet and second is the overseas acquisitions - the corporate guarantees are given on ONGC balance sheets. So at any point if the ONGC balance sheet reaches a point where exploration risks can’t be taken or the corporate grants can’t be given, then you will have a major problem in both sustaining exploration and in overseas acquisitions. As far as downstream companies are concerned it is a question of their ability to honour the letters for credit for imports, which are going on crude and products. We have a clean record of never defaulting on any payment but once that happens, the credit ratings could go for a six.
Q: What’s the way out of it? Do you think it will be just another issue of oil bonds? Could it be a retail price hike or do you think the government will lean on ONGC kind of companies to share more of the bill and the burden?
A: Oil bonds are just pieces of paper, this is like borrowing from future generation to enjoy today. So issuing more and more oil bonds would not make a difference to the three issue; namely ONGC’s ability to sustain exploration risk, overseas acquisition and their downstream compensability to finance the crude and product imports.
We have a house of cards which is administrative pricing; we have administered pricing now for almost 30-35 years, but the difference between the administered prices and the international prices after taking the dollar rupee parity is getting wider and wider and is already unsustainable.
If we keep on this issue which supposedly a political issue of not raising prices beyond a point, we are creating all kinds of problems. I am afraid one fine morning somebody will have to pay a price and that will be all of us as customers because we take the supply of petrol, diesel and everything else for granted. One does not worry about going to a petrol pump and getting petrol or diesel today but if that worry comes in then I am afraid we will be in for serious issues.
Q: That is the point because last year the rupee was on our side which is why the under recovery impact was not that hard given the way things have moved with the currency this year, where do you see the under recoveries heading - the ballpark figure is that it could double but do you think it could get worse than that?
A: It is very difficult to take a guess on that, because that is predicated on the crude price. When this UPA government came to power, crude was at USD 37/bbl. Today it is over USD 124/bbl. Come December we could be looking at USD 150/bbl or USD 180/bbl or whatever number. As those numbers change, the under-recoveries of subsidies could keep on increasing as even the prices remain controlled at these kind of levels. So it is very difficult to make the prediction.
Q: The equity market has been quite positive on one private player. The theory being that with every dollar to a barrel increase there is going to be an increase in terms of price per share. But do you think all this is predicated on how successful explorations are and where do you think that story is headed. I am sure you know I am talking about Cairn?
A: In the last three-four years a lot of people in India, I think are thinking of becoming Sheikhs, going on from camels to limousines. The businesses are little more complicated than that. The lifting costs, the finding costs are very high and there are a number of issues when you talk about coal pricing. But the major point is that even on New Exploration Licensing Policy (NELP) pricing is sacrosanct and will not be touched. What you will be seeing is that there are efforts to change the contracts and sign contracts on one’s own sanctity and these are contracts which were signed over seven rounds.
So today for somebody to invest in Energy Production (ENP) and even if one makes a discovery I don’t think one is really looking at building palaces and making Sheikhs so easily. There are far too many things which are open for change and change without notice and without valid reasons so to say.
Q: Since retail price hike looks unlikely because of inflation and political considerations, do you think additional burden could be put on ONGC’s head because at least that is a company which generates cash, which cannot be said of any other company in the oil sector?
A: Probably that would be the easiest and most obvious option. But this has been going on now for more than five-years or even more and the government has been saying that we own these companies so it is up to us to decide what to do with the balance sheet of the company. As of now ONGC has been able to retain their fundamentals to a large extent. It is a zero-debt company and they have significant cash reserves. That’s why they are in a position to sustain their capital investments and exploration risks. It’s a golden goose. The point is to what extent you go before you kill the golden goose.
Q: Where does all these leave the oil-marketing companies if things get as dire as you indicated and there are defaults on payments? Where do you think that whole space will go?
A: We are talking of a very specific issue of what you take as energy securities or oil securities in specific. Everybody takes availability of petrol and diesel for granted. The country is running a genset economy, it is being powered by diesel. We are import dependent by more than 70%. If you take gas, it is entirely import-dependent today, the LNG part of it. As we need more and more energy, we will have to import more. There are countries, which import 100% of energy and they have very sustainable and thriving economies. So import per say is not an issue. The issue is do you have a sustainable total framework of oil supply and pricing and distribution, which you don’t have. We are presently the only country in the world with a major economy who has this totally unsustainable dogmatic controls on oil pricing, distribution and industry. No other country has this kind of a situation.
Q: Do you wonder sometime why we do charades from time to time of setting up committees to make recommendations for dismantling Administered Pricing Mechanism (APM) and having proactive and reform oriented oil policies or fuel policies in the country. There was one a few months back - Rangarajan Committee- and a lot of fuss were made about it?
A: I think at some point we should do a ten-year review. In the1997 Cabinet decision, the government had decided on a very clear, clean and logical policy on dismantling, control pricing and having an open and sustainable economy which is totally integrated to the global economy. 1997 to 2002 was the timeframe; 2002 came and went and we are aware of today what we were at pre ‘97 because at least pre ’07 we knew that we have our administered pricing mechanism. Today we talk about dismantling APM but what we do actually is APM compounded.
This is a charade, there have been N-number of committees and everyone understands what is happening but we talk about political compulsions. We have elections going on-- Panchayat, Municipal, or State Elections. So you will never have time when you can sit back and say now there is no election and we can really go for opening up the oil sector. That’s not going to happen.
You can read the actual interview at:
http://www.moneycontrol.com/india/news/business/oil-subsidy-sharing-formula-decided-arbitrarily-subir-raha/16/23/337459
Copy pasting the same interview here...
Q: What you think about ONGC subsidy-sharing bill because our estimates are it could go up as high as Rs 50,000 crore. Is it likely that ONGC has to dish out such a large subsidy-sharing bill and do you see that 33% subsidy sharing formula being tweaked as well, the way crude is behaving?
A: Firstly the formula is purely an arbitrage decision, so 33% or 65% is anybody’s guess because there is no logic in working out these numbers. As far as ONGC or any other company is concerned, there are two major risks involved. One, is the financing for the exploration investments that always exists in the balance sheet and second is the overseas acquisitions - the corporate guarantees are given on ONGC balance sheets. So at any point if the ONGC balance sheet reaches a point where exploration risks can’t be taken or the corporate grants can’t be given, then you will have a major problem in both sustaining exploration and in overseas acquisitions. As far as downstream companies are concerned it is a question of their ability to honour the letters for credit for imports, which are going on crude and products. We have a clean record of never defaulting on any payment but once that happens, the credit ratings could go for a six.
Q: What’s the way out of it? Do you think it will be just another issue of oil bonds? Could it be a retail price hike or do you think the government will lean on ONGC kind of companies to share more of the bill and the burden?
A: Oil bonds are just pieces of paper, this is like borrowing from future generation to enjoy today. So issuing more and more oil bonds would not make a difference to the three issue; namely ONGC’s ability to sustain exploration risk, overseas acquisition and their downstream compensability to finance the crude and product imports.
We have a house of cards which is administrative pricing; we have administered pricing now for almost 30-35 years, but the difference between the administered prices and the international prices after taking the dollar rupee parity is getting wider and wider and is already unsustainable.
If we keep on this issue which supposedly a political issue of not raising prices beyond a point, we are creating all kinds of problems. I am afraid one fine morning somebody will have to pay a price and that will be all of us as customers because we take the supply of petrol, diesel and everything else for granted. One does not worry about going to a petrol pump and getting petrol or diesel today but if that worry comes in then I am afraid we will be in for serious issues.
Q: That is the point because last year the rupee was on our side which is why the under recovery impact was not that hard given the way things have moved with the currency this year, where do you see the under recoveries heading - the ballpark figure is that it could double but do you think it could get worse than that?
A: It is very difficult to take a guess on that, because that is predicated on the crude price. When this UPA government came to power, crude was at USD 37/bbl. Today it is over USD 124/bbl. Come December we could be looking at USD 150/bbl or USD 180/bbl or whatever number. As those numbers change, the under-recoveries of subsidies could keep on increasing as even the prices remain controlled at these kind of levels. So it is very difficult to make the prediction.
Q: The equity market has been quite positive on one private player. The theory being that with every dollar to a barrel increase there is going to be an increase in terms of price per share. But do you think all this is predicated on how successful explorations are and where do you think that story is headed. I am sure you know I am talking about Cairn?
A: In the last three-four years a lot of people in India, I think are thinking of becoming Sheikhs, going on from camels to limousines. The businesses are little more complicated than that. The lifting costs, the finding costs are very high and there are a number of issues when you talk about coal pricing. But the major point is that even on New Exploration Licensing Policy (NELP) pricing is sacrosanct and will not be touched. What you will be seeing is that there are efforts to change the contracts and sign contracts on one’s own sanctity and these are contracts which were signed over seven rounds.
So today for somebody to invest in Energy Production (ENP) and even if one makes a discovery I don’t think one is really looking at building palaces and making Sheikhs so easily. There are far too many things which are open for change and change without notice and without valid reasons so to say.
Q: Since retail price hike looks unlikely because of inflation and political considerations, do you think additional burden could be put on ONGC’s head because at least that is a company which generates cash, which cannot be said of any other company in the oil sector?
A: Probably that would be the easiest and most obvious option. But this has been going on now for more than five-years or even more and the government has been saying that we own these companies so it is up to us to decide what to do with the balance sheet of the company. As of now ONGC has been able to retain their fundamentals to a large extent. It is a zero-debt company and they have significant cash reserves. That’s why they are in a position to sustain their capital investments and exploration risks. It’s a golden goose. The point is to what extent you go before you kill the golden goose.
Q: Where does all these leave the oil-marketing companies if things get as dire as you indicated and there are defaults on payments? Where do you think that whole space will go?
A: We are talking of a very specific issue of what you take as energy securities or oil securities in specific. Everybody takes availability of petrol and diesel for granted. The country is running a genset economy, it is being powered by diesel. We are import dependent by more than 70%. If you take gas, it is entirely import-dependent today, the LNG part of it. As we need more and more energy, we will have to import more. There are countries, which import 100% of energy and they have very sustainable and thriving economies. So import per say is not an issue. The issue is do you have a sustainable total framework of oil supply and pricing and distribution, which you don’t have. We are presently the only country in the world with a major economy who has this totally unsustainable dogmatic controls on oil pricing, distribution and industry. No other country has this kind of a situation.
Q: Do you wonder sometime why we do charades from time to time of setting up committees to make recommendations for dismantling Administered Pricing Mechanism (APM) and having proactive and reform oriented oil policies or fuel policies in the country. There was one a few months back - Rangarajan Committee- and a lot of fuss were made about it?
A: I think at some point we should do a ten-year review. In the1997 Cabinet decision, the government had decided on a very clear, clean and logical policy on dismantling, control pricing and having an open and sustainable economy which is totally integrated to the global economy. 1997 to 2002 was the timeframe; 2002 came and went and we are aware of today what we were at pre ‘97 because at least pre ’07 we knew that we have our administered pricing mechanism. Today we talk about dismantling APM but what we do actually is APM compounded.
This is a charade, there have been N-number of committees and everyone understands what is happening but we talk about political compulsions. We have elections going on-- Panchayat, Municipal, or State Elections. So you will never have time when you can sit back and say now there is no election and we can really go for opening up the oil sector. That’s not going to happen.
Labels: Energy Crisis
posted by amitkeerti | 4:34 AM
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