Pandora's box

Opening up oil sector



The government’s decision to open up petroleum sector to private players brings big opportunities as well as challenges. On the plus side, it could considerably ease the supply of petroleum products, ending the current stop-again-start-again import arrangement under Nepal Oil Corporation (NOC), until now the sole importer and distributor of petro products in Nepal. Competition would undoubtedly help one of the most bloated and opaque bureaucracies in Nepal get into a better shape. Also, the end of NOC monopoly would diminish the unseemly political fighting to control its reins. In fact, at first blush, it is hard to find anything wrong at all with the liberalization of the oil sector. But although we wholeheartedly support the long-awaited change, we are wary of the enormous challenges to make the new arrangement work.



The first concerns pricing. NOC incurs a loss of Rs 5.43 per liter of diesel and Rs 513.14 per cylinder of LPG in subsidies, but turns a profit of Rs 6.63 and Rs 9.16 on a liter of petrol and kerosene respectively. Likewise, the per liter profit on aviation fuel ranges from Rs 20.24 to Rs 24.97. In this skewed market situation, the private sector will look to import and distribute the profit-making petrol, kerosene and aviation fuel, while saddling NOC with the burden to keep selling heavily subsidized diesel and LPG. With profits on petrol and aviation diverted to private coffers, and losses on diesel and LPG continuing to mount, NOC would go down before long. Thus if the private sector wants to wade into oil, they must be ready to shoulder some of the burden, at least at the initial stage.



One way to minimize losses would be to cut down on LPG subsides. Diesel subsidies are justifiable to an extent: people from the lowest rungs of the economic ladder rely on diesel-based transportation to get around. On the other hand, subsidizing LPG, 80 percent of which is consumed by big industries and hotels, are harder to stomach. But who will bell the cat? As things stand, any attempt to remove LPG subsidies would be political suicide.




The Petroleum and Gas Transaction Regulatory Order, which opens up the oil sector to private players, has been a long time in coming. But with big challenges every step of the way, it could be some time before it comes into force. One of these is the questionable ability of private players to muster up-front costs. According to the regulatory order, anyone with paid-up capital of US $120 million can establish a petrol, diesel and kerosene import and refining company, while the capital requirement for import and refinement of LPG is US $60 million. Actual costs could be many times higher: The international oil business is notorious for its cost overruns.



Are the Nepali private firms bidding for licenses (with zero expertise in oil trade) ready to shoulder such unforeseeable burdens? And how will the government handle the stiff resistance to change from all those directly or indirectly benefitting from the perennial mess at NOC? Finally, even if these initial hurdles are cleared, there is the tricky business of setting up a private-public mechanism to set the price of petrol products in line with international markets. All in all, there will have to be plenty of homework before the decision to allow private sector into petro market sees the light of the day.

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