Our oil sector is dominated by financially strong PSUs. Monetisation may not benefit it
Oil PSUs are not really dependent on the proceeds from asset monetisation for raising resources for the new infrastructure projects planned by them.
In the plan for monetisation of assets, created directly by the Narendra Modi government or through its Public Sector Undertakings, the government proposes to offer public assets such as roads, railways, airports, electricity transmission lines, natural gas, LPG and petroleum pipelines, shipping terminals, and mobile towers. The plan says that monetisation of assets will not involve the sale of land or underlying assets and that the ownership of those will continue to be with the government.
In a previous article, we explored the possible outcome of the monetisation of the warehousing sector. In this article, we examine its possible impact on the petroleum sector. Volume II of the National Monetisation Pipeline (NMP) by Niti Aayog provides details of the assets that are proposed to be taken up for monetisation.
The scenario in India
After China and the United States, India is the third-largest energy consumer in the world. Natural gas has a share of about 7.6 per cent in the energy mix. Indian Oil Corporation, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) are Public Sector Undertakings that have almost a complete monopoly in the sector. The infrastructure for natural gas transmission as well as that of petroleum products like petrol and diesel has been created over decades. Gas Authority of India Ltd (GAIL) has emerged as the major operator of gas pipelines and it has developed a network spanning 13,389 km.
According to the NMP, existing gas pipelines of 7,928 km are proposed to be monetised over the next four years. During FY 2022 itself, two pipelines of GAIL with a total length of 2,229 km are also proposed to be monetised. These are Dabhol (Maharashtra)-Bengaluru pipeline of 1,414 km and Dahej (Gujarat)-Uran (Navi Mumbai)-Panvel-Dabhol pipeline of 815 km. Other prominent players in the gas pipeline business are Reliance Gas Transportation Infrastructure Limited (RGTIL), Reliance Gas Pipelines Limited (RGPL), a wholly-owned subsidiary of Reliance Industries Limited (RIL), and State Public Sector Undertaking, Gujarat State Petronet Limited (GSPL).
Since there is only one private-sector player in the gas transportation business, it is not going to be easy to find more players who can compete in the monetisation of gas pipelines.
Monetising LPG and petroleum product pipelines
For monetisation of the LPG pipeline, HPCL’s Mangalore–Hassan (Karnataka) LPG pipeline has been identified by the NMP and it is planned to complete the process of monetisation by FY 2023. It traverses 356 km across the difficult terrain of the Western Ghats.
The NMP has also identified 2,643 km of product pipelines for monetisation. Product pipelines carry petroleum products, mostly evacuating the product from refineries. This is about 18.7 per cent of the total length of product pipelines of 14,063 km. By FY 2025, the government expects to get Rs 12,898 crore from monetisation of petroleum product pipelines and Rs 405 crore from monetisation of LPG pipelines.
The names of product pipelines, which will be taken up for monetisation over the next four years, have not been indicated in the NMP.
The longest product pipeline in India is owned by Indian Oil Corporation and it runs from Koyali (Gujarat) to Sanganer (Rajasthan) with an extension up to Panipat via Jaipur-Panipat Naphtha Pipeline. The second-longest pipeline is from Barauni (Bihar) to Kanpur (Uttar Pradesh) with a branch line to Motihari (Bihar), Baitalpur (UP), and Amlekhgunj (Nepal). It is possible that these product pipelines may be included in the plan for monetisation.
In the case of roads, ports, etc, the asset is not directly used by the government or the PSU owning it. However, in the petroleum sector, the pipelines are used entirely by the oil PSUs who have created these assets over several decades, when hardly any petroleum infrastructure existed in the country. These were financed either by internal accruals of these companies or by borrowing from the banks or the market.
Strengths of Oil PSUs
Due to their strong balance sheets, the oil PSUs can raise cheap funds from the domestic and global markets. In 2020-21, oil companies would have raised funds at quite a cheap rate, say at about 6-7 per cent interest, from Indian banks and markets. So, the oil PSUs are not really dependent on the proceeds of asset monetisation for raising resources for the new infrastructure projects planned by them.
Another important point is that LPG and natural gas are under the GST regime while petroleum products like diesel and petrol still stay outside it. If monetisation of product pipelines is successful, the oil PSUs will have to pay GST to the new corporate entity but they will not be able to take an input tax credit for the GST paid by them. For pipelines that are not being used to their entire capacity, investors will look for an internal rate of return of 12 to 16 per cent, while oil PSUs may be getting a return of about 8 per cent from their investments. For achieving this, investors are likely to ask for high charges for use of the asset, which was so far being used by oil PSUs at depreciated costs.
We must also note that oil pipeline projects are extremely difficult to implement because they pass through private lands, for which the right to use has to be obtained from individual landholders.
The oil PSUs have created these strategic assets due to the support of the Union Ministry of Petroleum as well as the State government. One hopes that the long-term Public-Private-Partnership concession document would also take into account the strategic nature of these assets and assign a financial cost to them in the bid document. India’s oil sector has so far been dominated by PSUs and there is almost one to one relationship between the refinery and carrier (pipeline). The oil companies may therefore have to see how they will benefit from the monetisation of their assets.
The government has already sold its 51.11 per cent stake in Hindustan Petroleum Corporation Limited to Oil and Natural Gas Corporation (ONGC). The privatisation of Bharat Petroleum Corporation Limited (BPCL) is also on the anvil.
The monetisation of petroleum and gas pipelines should be read in this context.
The author is Visiting Senior Fellow ICRIER. He was an independent director on the board of Hindustan Petroleum Corporation Limited. Views are personal.