DIESEL DEREGULATION & GAS PRICE HIKE - WHOs, WHYS, HOWs & WHATs
By Ruma Dubey
After days of lackluster trading, the market is today like a woken up giant. Reacting more to the diesel price deregulation and gas price hike, traders are having a pre-Diwali bonus. The victory of BJP in Haryana and Maharashtra, which now gives this national party a more pan-India presence has also helped boost the optimism.
Diesel price deregulation and gas price hike were two ‘items’ on the expected agenda. These decisions had been deferred for so long that one had stopped expecting them. But this ‘Sunday special’ was indeed a big surprise. So we now take a quick Q&A of these two happenings, trying to understand the concept better.
Q: What is this diesel price deregulation?
A: As the name suggests – deregulation, which means removing it from the control of regualtors. So the Govt will no longer control the prices; it will be demand and supply and in case of fuel, the international price of crude which will decide the price. Thus when crude falls, diesel price will fall and wen crude rises, diesel price will also rise.
Q: What does this mean for me and you?
A: With this, price of diesel, like petrol, would now stand linked to the market without any government intervention, with retail rates reflecting price changes in the global market. The immediate impact on diesel was a reduction in prices by Rs 3.37 a litre (ex-Delhi) with effect from midnight Saturday. Diesel rates were last cut on January 29, 2009, by Rs 2 a litre .
Q: Why this move now?
A: This was very much on the agenda and with crude price now going southwards, as such OMCs, starting from 16th Sept were making a profit on sale of diesel. Thus with crude prices down, this was the most opportune time as no one would have celebrated deregulation like the way it is today if crude price had been on the rise.
Q: Will this increase competition for OMCs?
A: Most certainly! Till now the private sector fuel sellers like Essar and Reliance had to sell fuel at much higher prices those owned by HPCL, BPCL and IOC as they did not have the benefit of subsidy and had to sell diesel at market price. This deregulation now creates a level playing field and all, state owned OMCs and private sector players will sell fuel at same rates. This is good news for the likes of Essar, Reliance and Shell and HPCL, BPCL and IOC which have a 95% market share, will now have to share the spoils. ONGC is also expected to start selling fuel through its subsidiary, Mangalore Refinery and Petrochemicals Ltd (MRPL).
Q: What does this mean for the user industry?
A: Naturally, demand for diesel will go up. Diesel as a vehicle fuel was losing sheen as there was now major difference between diesel and petrol; this price cut will help. Trucks which use diesel will stand to benefit the most and hopefully it should bring down overall inflation. Apart from vehicle, back-up generators and water pumps would be big beneficiaries.
Q: Why are OMCs like HPCL, BPCL and IOC happy with this move?
A: They have finally got out of the diktat of the regulator and will now be able to sell fuel at market prices, meaning their under-recoveries or losses caused due to selling fuel at below market price will now go. These retailers took debt to fund the losses, waiting for the Govt to reimburse through subsidy. Thus when these under-recoveries go, their debts will also go down, meaning interest charges will reduce and margins will improve.
Q: Should ONGC also celebrate?
A: ONGC is a big beneficiary of the gas price hike but along with that, this deregulation is also good news as it means that it will no longer need to fund the OMCs under-recoveries.
Q: On gas price hike, what exactly was this?
A: After postponing three times, the government yesterday approved a revised formula of pricing almost all domestically produced natural gas from November 1. The current price of US$ 4.2 per million British thermal unit (mmBtu) will rise to US$ 6.17 per mmBtu on a like-to-like basis. The Finance Minister, while announcing this yesterday stated that price from November 1 and would be valid till March 2015, will be US$ 5.61 per mmBtu on heat value the fuel will generate on gross calorific value (GCV) basis. The price would then be revised for the next six months ending September 2015 on the basis of prices prevalent between January 2014 and December, 2014. The prices would be announced 15 days in advance of the half year.
Q: Why is it that Reliance Industries is not cheering the gas price hike?
A: Reliance will get the benefit of price rise of US$5.61 till its arbitration matter is settled, where penalty of $2.50 billion is levied for 3 years by the Govt for lower production. Also, this new price of $5.61 a unit is lower than what reports had suggested of around US$ 6-6.50 but much lower than the price arrived at by the Rangarajan panel formula at about US$8.40. In fact RIL was not happy even with this $8.40 price. So what happens now is that RIL will be paid $4.2 a unit till its dispute with Govt is settled. Though RIL will charge its customers $5.61 a unit from November 1, RIL will get only $4.2, the balance $1.41 a unit will remain credited to a gas pool account maintained by GAIL. Thus no benefit of the new price and the new price being much below RIL’s estimates has removed all the cheer from the stock.
Q: How does ONGC benefit?
A: For ONGC, every US$1 rise in gas price will boost its revenues by Rs.4000 crore and net profit by Rs.2350 crore. Given the US$ 2 price hike, from November onwards, till end of March, OGNC’s net profit will gain around Rs.1950 crore.