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Deregulate oil industry immediately: survey

Deregulation of India's downstream oil industry is inevitable as it has been recognised as an important precursor to attract investment in this capital-intensive sector, according to a study.

In view of the robust oil industry and strong economy, deregulation is the need of the hour and the process should start immediately, says the study, conducted by SBC Warburg, a division of the Swiss Bank Corporation.

If this is done, SBC Warburg believes that two of India's major oil refineries and marketers -- Hindustan Petroleum Corporation and Bharat Petroleum Corporation -- will attract investments.

In its Indian oil sector review, and two company updates released on Friday, SBC Warburg examines the structure of the strategically important Indian downstream oil sector. It concludes that while deregulation of the industry is imperative to generate necessary investment, the deficit on India's oil pool account peaking in 1997 to Rs 179 billion will make it difficult for the government to deregulate in the short term.

The bank also analyses Hindustan Petroleum and Bharat Petroleum -- India's second and third largest downstream oil companies, and its fourth and fifth largest companies in terms of sales -- in the context of their earnings potential under the current administered pricing mechanism and their position in the event of reform of the industry.

''The faster India's domestic economy grows, the faster will be the rate of growth in energy demand,'' said Sanjoy Bhattacharyya, one of the SBC Warburg directors.

''With demand for oil already expected to rise by 6 to 7 per cent per annum over the rest of the decade, failure to boost domestic crude oil production and refinery capacity may eventually impact India's economic growth and balance of payments position,'' he said.

According to SBC Warburg, speculation on the timing of deregulation is difficult, and exactly what form it will take remains to be seen. ''While momentum for reform is gathering, the government's delicate political position could result in slow progress, as the sector contributes 4.3 per cent to the wholesale price index, and petroleum product prices generally have a multiplier effect,'' said Bhattacharyya. ''The political sensitivity of any price increase, therefore, coupled with the oil pool account deficit, means that when deregulation is announced it is unlikely to be fully implemented for several years,'' he added.

Considering the key determinants of company profits in the current regulated environment -- equity investment in operating assets, outperforming regulatory targets, financing costs and profits earned on controlled products -- SBC Warburg believes that Hindustan Petroleum and Bharat Petroleum have strong earnings potential. The bank further projects that when the industry is reformed, the two companies are strongly positioned to take advantage of the situation.

Hindustan Petroleum has aggressive new investment plans which should lead to an annual earnings growth of 22 per cent over the next few years. Upon deregulation, the company's two coastal refineries, distribution facilities and retail network of 4,215 sites will represent a significant logistical advantage over potential competitors, particularly in the South, said B P Singh, a research analyst at SBC Warburg.

Bharat Petroleum also has major investment plans, which will give rise to 14 per cent growth in earnings in 1997-98 and 27 per cent in 1998-99. The company is well placed for reform, with its established network of around 4,375 retail sites, direct supply links to Bombay High crude oil, and potential to expand its existing relationship with its joint-venture partner, Shell, he said.

UNI