New Delhi: A day ahead of a critical meeting of the Union cabinet to debate an increase in the retail prices of petroleum products, India’s energy security efforts received a leg-up with the country’s central bank, the Reserve Bank of India, liberalizing rules for overseas investments and hedging by oil companies.
The move will strengthen state-owned oil firms that have faced the brunt of the steep increase in crude prices, because the price at which they sell fuel is regulated by the government, which has set these at a discount to the cost of production.
While the increase in retail prices, however small, will provide some succour to these firms, easier hedging norms will help them protect themselves from a sharp increase in the price of crude and overseas oil assets will give them access to “equity oil” or crude produced by fields in which they have a stake.
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Under the new rules that were announced on Tuesday, even a relatively new public sector oil form such as ONGC Videsh Ltd will now be allowed to sidestep red tape when it spots an opportunity to buy into oil blocks abroad. ONGC Videsh’s freedom to invest overseas has been enhanced to match the level of the so-called Navratna public sector companies such as its parent Oil and Natural Gas Corp. Ltd, or ONGC. Companies classified as Navratna are allowed more autonomy of management.
Simultaneously, downstream oil refining firms such as India’s largest refiner, Indian Oil Corp. Ltd, will now be allowed to hedge their anticipated crude oil imports. RBI had signalled its intent to relax these restrictions in governor Y.V. Reddy’s policy statement in April.
Currently, refining firms are allowed to hedge for periods up to one year, according to S.V. Narasimhan, director, finance, IOC. Hedging against anticipated imports is good from a long-term perspective and something the refining firms had been asking for, he added.
ONGC Videsh, which plays the role of the overseas investment arm of ONGC, has acquired stakes in oil blocks in several countries such as Brazil and Russia. “We are actively engaged in acquiring overseas properties. This step (policy liberalization) will help our search. It is a positive step and also shows confidence in the Indian economy,” said R.S. Sharma, chairman and managing director, ONGC.
The steps to liberalize overseas investments and hedging rules, together, will serve to boost the country’s overall approach to energy security, say experts. “Hedging will definitely help oil firms do better planning, get better pricing for the imported product and reduce fluctuation. Tying up with foreign firms through JVs (joint ventures) and equity will certainly help Indian companies get larger amounts of crude and negotiate better deals. This is happening in a big way now,” said a Mumbai-based investment banker who did not wish to be identified.
According to the latest data available, India’s oil imports between April and December 2007 were $54.4 billion, 23.7% higher than imports over the same period in 2006. Oil is the biggest import item for India and accounted for 31.6% of India’s total imports by value during this period. India’s net oil import bill, which is total imports minus total exports, has gone up from $29.5 billion in the first nine months of 2006-07 to $44.7 billion over the same period in 2007-08.
Along with the sharp rise in oil imports, the international price of crude has zoomed up. Consequently, IOC is not aggressively hedging on account of volatile conditions in the oil market, Narasimhan said. Once this volatility subsides, IOC would in a position to make good use of the liberalization in hedging rules, he added.
Utpal Bhaskar, Sangeeta Singh and Udit Misra contributed to this story.