The fuel-trade relation between Nepal and India is somewhat analogous to that of Russia with the Central Eastern European (CEE) countries. Like the CEE countries, which rely on Russian gas to warm their homes, Nepal relies 100 percent on imported petroleum products from India. Assuming no foul play from the increasingly dominant supply side, the proposed pipeline can significantly enhance the security of fuel supply in Nepal. This is especially the case as the Raxual depot caters to the energy voracious central region where approximately 70 percent of all petroleum products are consumed. However, the price tag attached to the improvement in supply security can be significant in terms of energy dependency. And, our energy dependency is certainly set to increase with the demand for fuel increasing by 20 percent annually. Importantly, the political relations between India and Nepal have been at times murkier and not stable. Considering the monopoly of IOC and energy being a strategic industry, I am not confident that infrastructural development alone will boost Nepali fuel supply security in the long run.
While the opportunities for cost savings exist with the construction of the pipeline, it is not guaranteed whether such cost savings will be passed on to the final consumers.
However, there are bigger potentials for both private and external cost reductions with the new pipeline in place. The fuel transportation cost can significantly go down with lower level of technical and non-technical loss (for e.g. fuel theft). Presently, 1,180 tankers operated by 494 transporters are responsible for distributing oil to 2,500 scattered retailers in the country from different depots in India. With a direct pipeline, a significant cost savings of as much as 40 percent from the current level can be achieved with lower transportation costs. Likewise, a decrease in fuel usage would also mean less damage to the environment with lower emissions. Road congestion in the southern region can also ease up with a decrease in the number of vehicles involved for transporting fuel. While the opportunities for cost savings exist with the construction of the pipeline, it is not guaranteed whether such cost savings will be passed on to the final consumers. A lowering in costs may not necessarily mean a lower price to the Nepali end consumers given the current state of the retail market.
The Nepali petroleum retail market lacks adequate transparency and regulation allowing the retailers to behave strategically. Artificial scarcity of fuel from retailers and suppliers has been common in the past and has not helped to lower prices. It is necessary to understand that the Nepali fuel price is immediately exposed to monopoly pricing at the source coupled with fixed exchange rate between India and Nepal. With added natural and artificial margins at the supply chain with no particular government price subsidy unlike electricity, the price of petroleum products for end users in Nepal is much higher than the costs incurred. A significant societal welfare loss has thus resulted from such price allocation inefficiency causing a major proportion of electricity deprived rural population in the country to live under fuel poverty.
But, every cloud has a silver lining. The construction of the proposed pipeline can prove to be pivotal at a time when the government is thinking about involving private sector in fuel trade. Provided that the private players are allowed to use the pipeline in equal terms as NOC upon certain access charges, the fuel distribution and retail segments can get competitive benefiting the end users. But, having a non-discriminatory access to the pipeline is a pre-requisite to realize the benefits of competition. The pipeline should also be accessible to third parties willing to supply fuel to Nepal. This may involve a serious negotiation with India regarding the terms and conditions of third party access to the pipeline.
It is also necessary that the terms and condition of private access and access charges are set by an independent body based on economic logic rather than by the incumbent.
Though a thorough social cost-benefit analysis is needed to exactly study the social desirability of the 1.6 billion pipeline project, the opportunities to benefit from the project is immense. However, the challenge would be to create proper institutional framework to exploit these opportunities. A solution in a liberalizing Nepali fuel sector would be to create an independent regulatory body to look after the fuel affairs in the country from market monitoring to charge settings. Similarly, the country should also decrease the reliance on oil products by switching and investing into domestic energy sources to be less energy dependent on foreign imports. While building a pipeline does not necessarily mean importing more oil, the real benefits from the pipeline will seriously depend upon the extent to which economics will precede over vested interests and politics in the future.
rabindra.nepal@gmail.com
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