Is there grand design behind free run to fuel prices in India
The almost daily rise in prices of petrol and diesel that we are seeing off late is a reminder of the time nearly 50 years ago when Indians of another era woke up to a similar spectre. The 1973 oil embargo by some Arab countries, followed by the launch of the Organization of Petroleum Exporting Countries (Opec), led to a huge surge in oil prices. India, as dependent on oil imports then as it is now, had to follow suit. Prices of kerosene, the main fuel used by households, and cooking oil, rocketed, forcing the government to ration their supply and leading to long, interminable queues outside shops. India’s Fifth Five Year Plan envisioned oil prices climbing to $4.75 a barrel by 1978. Instead, they were up to $8 a barrel by 1974. What’s more, with 90 percent of the crude oil imports marked for critical uses including in fertilisers, power generation, diesel oil for trains and tractors, and furnace fuel for big industries, there was little scope to curb consumption. However, given the low base of private vehicle ownership, there was little impact on India’s car industry. The fuel-guzzling Ambassadors and Fiats kept trundling out of the factories and since prices of tickets in public transport were a political hot spot, the government ensured commuters remained immune to the rising fuel price graph. Globally though, and in particular in the United States, that spike fundamentally changed the auto industry. Till 1972, all the non-US brands together had a low 13 percent market share in the US. The demand for more fuel-efficient vehicles saw a rush of Japanese and European cars into the world’s biggest market, and today almost 50 percent of the cars in the US are made by companies such as Toyota, Honda, Nissan and Hyundai. In an effort to reduce the weight of cars and boost their fuel economy, manufacturers started innovating furiously and many of these innovations define today’s automobiles. Think turbocharging, the use of lightweight materials and front-wheel drive. All of these are a result of the innovations unleashed by that Opec move. There were other more profound changes to the market, not all of which were very positive. Thus, along with triggering the quest for alternate fuels, it also paved the wave for the rise of the SUVs as Americans, not happy with the smaller cars being launched, went looking for more space. We can see that odious trend continuing till today with Indians evolving their own version of the low-cost SUV. In most of these changes India has merely aped the West. This time however, with the runaway prices of fuel in the country bucking the trend of falling prices elsewhere, India has to have its own agenda of change. There’s a view that letting fuel prices continue their upward march, is part of the government’s plan to nudge motorists to buy electric vehicles. Under normal circumstances rising prices of such a critical commodity particularly in a year when several key states are going to the polls would have certainly seen robust intervention. That there hasn’t been any so far even in the face of trenchant criticism would seem to suggest this is a once-in-a-lifetime effort at behaviour change. The aim in this case is to wean car owners off fossil-fuel-based vehicles and the tool seems to be soaring oil prices. In the past such a strong stick and carrot approach has worked. We saw that recently when the steep fines for not wearing masks did far more to drive Covid-19-appropriate behaviours than the appeals and messages on mass media. Yet changing the vehicle mix in India may not be such an easy thing. In general, rising prices impact demand if consumers are able to find substitutes. In the absence of suitable substitutes, that impact is limited. It is evident that as yet India doesn’t have enough EV models at various price points to give buyers enough options. Furthermore the charging infrastructure doesn’t provide comfort to drivers. The huge rise in car ownership in India along with galloping levels of pollution represent a failure of markets as well as of public policy planning. The solution lies in a policy initiative that reverses the earlier steps. The central government did announce significant spending on metro systems across the country in the recent budget. In addition, there’s also a boost for special freight corridors to push the use of the rail network. These are pieces of the tapestry that will ultimately build a mobility future based on cleaner fuels. What’s missing is a comprehensive plan that’s clearly and candidly communicated to the people.
OPINION: Oil risks overheating after OPEC+ leaves output unchanged
By deciding to leave production unchanged for another month at its meeting on Thursday, OPEC+ risks causing the oil market to overheat and creating conditions for more instability in future. The expanded group of oil exporters defied expectations of a majority of analysts and traders that it would respond to escalating prices and an intensifying backwardation in the futures market by raising output. But the decision should not have come as a complete surprise. It is consistent with the group’s behaviour over the last decade, and with OPEC-only behaviour for the decade before. The group’s decision-making has usually lagged market conditions when prices are falling – but especially when they are rising. For all the group’s rhetorical commitment to market stability, past production decisions reveal its goal is to obtain the highest possible price in the short term. In an environment of rising prices, the group has continued restricting output below its potential level to enjoy a temporary windfall in terms of higher prices. OPEC+ does not have a track record of responding proactively to add extra barrels to the market to cool a rapid rise in prices and intensifying backwardation. Extra barrels have mostly come from declining compliance among individual OPEC+ members with an existing output agreement and a rapid expansion in U.S. shale production. As a group, OPEC+ has usually allowed the market to overheat, until accelerating U.S. shale production, decelerating consumption, or both, threaten to push the production-consumption balance into surplus. ENJOYING THE WINDFALL Before the decision, front-month futures prices had returned to levels before the onset of the first wave of the coronavirus, and were in a range that has caused U.S. shale production to increase over the last decade. Most of the extra stocks that accumulated in the second quarter of 2020 as a result of the epidemic and volume war between Saudi Arabia and Russia have been digested by the market (https://tmsnrt.rs/3kMuhS1). OECD commercial petroleum inventories are back in line with the pre-pandemic five-year average for 2015-2019, according to estimates prepared in February by the U.S. Energy Information Administration. As a result, Brent futures for the first six listed contracts have moved into a backwardation of $4 per barrel, consistent with an under-supplied market in which stocks are at or below the level desired by traders and refiners. Brent’s six-month calendar spread has risen to the 95th percentile for all trading days over the last three decades, signalling production is running well below consumption and inventories are expected to become very low. In the physical market, dated Brent’s calendar spread for the first five weeks is in a backwardation of 32 cents per barrel, the 65th percentile for all trading days since 2010, confirming the market is moderately tight already. OPEC+ chose to ignore these indicators of a rapidly tightening market and focus instead on the “uncertain market conditions” and the need to “remain vigilant and flexible”. “The meeting recognized the recent improvement in the market sentiment by the acceptance and the rollout of vaccine programs and additional stimulus packages in key economies,” the group said in a statement. It urged all members “to remain on the course which had been voluntarily decided and which had hitherto reaped rewards”, an implicit reference to higher prices and revenues. BEHIND THE CURVE The petroleum price cycle appears to be repeating itself, with OPEC+ opting to continue restricting output rather than respond to falling inventories, rising prices and increasing backwardation. The last time prices were around $70 per barrel and rising, and the market was in a similar backwardation, was in May 2019 and before that in April 2018. Key OPEC+ decision-makers made similar arguments on both occasions (https://tmsnrt.rs/3kLLhYD). “It is critical that we don’t make hasty decisions – given the conflicting data, the complexity involved, and the evolving situation,” Saudi Arabia’s then energy minister Khalid al-Falih said on May 19, 2019. “I am not sure there is a supply shortage, but we will look at the (market) analysis. We will definitely be responsive and the market will be supplied,” Falih said a day earlier, when asked whether an increase in output was on the table due to oil shortage concerns. The previous year he had made a similar point. “If we have to err on over-balancing the market a little bit, so be it. Rather than quitting too early and finding out we were dealing with less reliable information … stay the course and make sure that inventories are where the industry needs them,” al-Falih said on Feb. 14, 2018. DIFFERENT THIS TIME? OPEC+ appears to think this time will be different, because shale producers have been chastened and no longer have the financial resources for a major expansion in output, after two slumps in the space of half a decade. “‘Drill, baby, drill’ is gone for ever,” Saudi Arabia’s energy minister Prince Abdulaziz bin Salman said on Thursday. “Shale companies are now more focused on dividends.” OPEC+ appears to be gambling shale producers will remain on the sidelines, at least for some months, and this gives it more scope to enjoy a longer period of higher prices without risking another slump. U.S. shale industry leaders have been preaching their new-found conversion to a strategy of production restraint at industry conferences recently. But both shale producers and OPEC+ said similar things during 2017 and 2018, in the aftermath of the last price slump, and the promised drilling restraint did not last. The number of rigs drilling for oil in the United States has already risen to 309, up from a low of just 172 last August, though it is still well below 678 at the same point last year. Crucially, however, before the Texas ice storm, the rig count was rising on a similar trajectory to the increases after the last two slumps ending in 2009 and 2016. This time could be different for U.S. shale firms in terms of restraining production as prices rise. It could be different for OPEC+ in terms of adding
Mumbai: Sena-led state may cut VAT on fuel to score against Centre
All eyes are set on the state budget, to be presented on Monday, as there is a possibility for the Maharashtra government to marginally reduce value-added tax (VAT) on petrol and diesel to score brownie points over the BJP at the Centre, which has not given any relief in excise duty. The price of petrol in Mumbai has peaked to an all-time high of Rs 97.57 per litre while diesel costs Rs 86.6 per litre. A few days ago, deputy chief minister and finance minister Ajit Pawar had hinted at some relief in fuel prices. Political experts say that any tax relief given at this juncture will be remembered by citizens for a long time. But it could be a tough call for Maharashtra, as it earns over Rs 25,000 crore annually from VAT on fuel. Every Re 1 hike per litre of petrol and diesel gives the state additional VAT of Rs 140 crore and Rs 275 crore, respectively, officials said. Also, VAT on fuel is a major revenue earner for the state exchequer apart from excise on liquor, property registration charges and stamp duty, and tax on vehicles. On Sunday, petrol inched close to the Rs 100 mark, costing Rs 99.72 per litre in Parbhani, and diesel approached Rs 90 in various districts across Maharashtra. Experts told TOI that 66% of the price the consumer pays for petrol and 60% for diesel goes in taxes levied by the Centre and the state. Veteran petrol dealer and pricing expert Kedar Chandak explained that the base price of petrol has come down by Rs 33.57 per litre in seven years because of a fall in international crude prices. “The crude oil rate was 118 dollars per barrel as of August 1, 2014, as against the current rate of 65 dollars,” he said. But the central government frequently increased the excise duty on petrol, as and when crude price reductions occurred, thus depriving consumers of any benefit of falling crude prices, Chandak said, adding that Maharashtra also imposed high VATs on fuel. “When you are purchasing petrol at the pump for Rs 97.57 per litre today, you are paying Rs 33.59 for the fuel and the rest as taxes,” he said. “Similarly, the basic price of diesel for every litre is Rs 35.26 today when you actually pay Rs 88.6 at the pump, which includes taxes.”
Cairn wants India to honour its word and pay $1.4 billion, shareholders to seek enforcement
British oil firm Cairn Energy said its shareholders, including top financial institutions of the world, expect the use of the company’s “strong powers of enforcement” to recover $1.4 billion from the Indian government should it not keep its word of honouring international arbitration tribunal awards on retrospective taxes. Cairn has already moved courts in the US, UK, Netherlands, Canada, France, Singapore, Japan, UAE and Cayman Islands to get the December 21 international arbitration tribunal award registered and recognised – the first step before it can seek seizure of the Indian government assets such as bank accounts, payments to state-owned entities, aeroplanes and ships in those jurisdictions, in case New Delhi does not return the value of the shares seized and sold, dividend confiscated and tax refund stopped to adjust a Rs 10,247 crore tax demand raised using retrospective legislation. Cairn CEO Simon Thomson, who last month met top finance ministry officials for three straight days over the issue, said the Indian government should keep its word on honouring arbitration awards and return the $1.4 billion that an international arbitration tribunal has ordered rescinding a retrospective tax demand. “Our shareholders are watching,” he said in a Twitter post. “They expect India to honour its obligations and to quickly bring this matter to a conclusion and if India do not do that, and if India delay, then our shareholders expect us to pursue our strong powers of enforcement which we have to do”. Finance Minister Nirmala Sitharaman had on March 5 indicated the government’s intent to appeal against the award when she said it is her “duty” to appeal in cases where the nation’s sovereign authority to tax is questioned. Interestingly, the December 21 arbitration award specifically made clear that the basis of the judgment was not a challenge to the 2012 law, which gave the government powers to tax deals retrospectively, or India’s sovereign right to tax. “The issue at stake is thus not a matter of domestic tax law; it is rather whether the fiscal measures taken by the State, valid or not under its own tax laws, violate international law,” the tribunal had said. After losing a Supreme Court case against levying tax on capital gains made in the 2007 sale by Hutchison of its India business to Vodafone for USD 11.2 billion, the government had in 2012 enacted legislation that gave it powers to tax such deals retrospectively. Thereafter the tax department said Vodafone should have withheld tax on the deal and issued a notice seeking Rs 11,218 crore, later augmented by Rs 7,900 crore in penalties. In January 2014, the department assessed that Cairn too made an alleged capital gain on reorganising its India business prior to an IPO in 2006-07 and sought Rs 10,247 crore in taxes. But unlike Vodafone where no enforcement action was taken, it seized and sold Cairn’s residual stake in the India unit, confiscated dividends due from such holding, and stopped tax refund due to it. Cairn maintained that its reorganisation was in compliance with the laws prevalent at that time and had been approved by the government and regulators, including Sebi, and challenged the tax demand before an international arbitration tribunal, which overturned the demand and ordered a return of USD 1.4 billion. “The award has now been finalised and it is time for the Government of India to honour that award as they have said on multiple occasions over the years that they would do,” Thomson said. “India now needs to swiftly bring this matter to a close, to comply with their obligations and to honour the award.” And nothing less than that is what Cairn shareholders want. “That is what our shareholders; those global financial institutions expect; that is what they require,” he said. “I believe that if India do that, it will reaffirm to those shareholders that India can be a positive investment destination.” The shareholders include big financial institutions such as BlackRock, Fidelity, Franklin Templeton, Schroders and Aviva. Vodafone too had last year won an arbitration award against the retro tax, which the government has challenged before a court in Singapore – the seat of the arbitration tribunal. In the case of Cairn, the seat of arbitration was The Hague and any challenge will have to be brought there. Sources said the award is final and the merits cannot be appealed, and under Dutch law, the grounds for setting aside an arbitral award are extremely narrow. These grounds include no valid arbitration agreement, rules for composition not being observed, tribunal exceeding its mandate, an award not signed or not reasoned and the order being contrary to public policy or public morals. The Cairn award was unanimous with all three judges, including one appointed by the Indian government consenting. The 582-page order gave detailed reasoning on the very point of the challenge brought by the Indian government, including the point that taxation did not form part of the bilateral investment treaties. Cairn had challenged the tax demand under the UK-India Bilateral Investment Treaty, which affords strong provisions to enforce a successful award and the decision of the tribunal is final and binding on both parties. “We have made our position clear on retrospective taxation. We have repeated it in 2014, 2015, 2016, 2017, 2019, 2020, till now. I don’t see any lack of clarity,” Sitharaman had said, referring to the Modi government’s stand of not raising any new tax demand using the 2012 legislation. “Where I find an arbitration award questioning India’s sovereign authority to tax… if there is a question about the sovereign right to tax, I will appeal, it’s my duty to appeal,” she said. “An arbitration award, which questions the authority of the government to tax, I will appeal on that.”
Bolstering India-Myanmar energy partnership – a step towards developing Act East Policy
The Government of India revealed its proposal to invest $6 billion to build a petroleum refinery project in Myanmar’s Thanlyn region near Yangon. It is aimed at strengthening India’s ties with Myanmar, propel their cooperation in the energy sector and diplomatically counter Myanmar’s dependence on infrastructure development from China. Till now, Indian Oil Corporation Limited (IOC) has exhibited its interest in the development of this infrastructure building project [1]. With Myanmar being a strategically significant partner for India, GOI has already invested around $722 million and has further approved investment of around $122 million in the Shwe Oil and Gas project via ONGC Videsh Limited (OVL) [2]. These initiatives are being taken to counter China’s influence over Myanmar through its Belt and Road Initiative (BRI) and also aims to boost India’s Act East Policy (AEP). The Act East Policy of India AEP, an extension of the erstwhile Look East Policy (LEP), reflects the change in India’s foreign policy, thereby slightly steering its focus from west to east. It was a result of breakdown of USSR and dominance of USA post-cold war and the unprecedented rise in oil prices as a result of the Gulf War which had a detrimental effect on the Indian economy. These events forced India to widen its trade network and forge economic, strategic and diplomatic relations with the countries of south east Asia and Association of South East Asian Nations (ASEAN). These circumstances led to the formation of LEP in the year 1991, which was eventually renamed as AEP in the year 2014. To improve its economic relations with ASEAN, GOI is also in discussion for the formation of the Supply Chains Resilience Initiative (SCRI) initiated by Japan with Australia as the other partner, which will reduce dependence on China by ensuring less volatility rates as compared to China’s. The GOI had initiated several projects in Myanmar, which is a geostrategic country for India, but those projects lag behind their scheduled completion date [3] whereas China’s growing footprints in Myanmar have led to its dominant position with regard to investments in energy and infrastructure sector. China has been augmenting its investments through major projects like the Letpataung Copper Mine and the Sino-Myanmar Oil and Gas Pipeline, which allows China faster import of oil. China has also invested heavily in LNG plants of total 580 megawatts capacity and has significant presence in Sittwe where oil and gas pipeline terminal with a 12 million tons of crude and 700 Km pipeline link is now fully operational. China is investing proactively in these ASEAN nations, especially in Myanmar, through its BRI initiative which appears to have been big success for Chinese and a big concern for GOI. China has recently announced plans for a multi-billion dollar deep-water port in Kyuakpyu, which is geographically close to India and poses high security threat taking into account China’s string of pearls strategy. Apart from BRI threat to AEP, there are some internal challenges for GOI with regard to effective implementation of AEP in the North East region such as lack of infrastructure with limited connectivity, insurgency problem, lack of coordination with the government agencies [4]. BRI is not only the threat for India’s security, but also a threat to ASEAN countries due to its debt trap diplomacy which keeps on exploiting the susceptibilities of the weaker countries. Most nations are getting disillusioned with BRI because it is taking the host countries towards debt traps, Sri Lanka’s Hambantota port is the prime example of China’s debt trap diplomacy [5]. Lately, Myanmar’s all powerful generals are upset with the Chinese strategy of mounting pressure on Myanmar to implement BRI projects in this ongoing Covid-19 pandemic and several other BRI related projects threaten to push Myanmar to a debt trap which has led Myanmar to speed up India backed infra projects [6]. This has given GOI an opportunity to play its trump card intelligently to counter BRI’s dominance in these ASEAN countries by completing the long run projects, ensuring active involvement in the bordering states of India, empowering the states in AEP particularly eastern and northeastern states of India by introduction of the special package for implementation of AEP in these states, strengthening the security in the north east region which is disturbed by insurgency, setting up of branch of NITI Aayog would help in mitigation the gaps between Centre and States [7]. Myanmar and India India is presently the 11th largest investor in Myanmar and most investments have been in the oil and gas sector. The announcement of investment by the GOI for setting up of oil refinery is being seen as an act of trying to catch up with the Chinese engagement. ONGC Videsh Limited, IOCL and GAIL are already active in Myanmar and have their offices in Yangon. Currently, the Myanmar Government has restructured their energy sector and is keenly focusing on the natural gas as an important source to meet its energy requirements. So, there is growing focus in Myanmar on natural gas, thus with the present announcement by the GOI is very clear that GOI intends to utilize and optimise on this opportunity present in Myanmar [8]. Additionally, GOI has undertaken the largest project of implementation of the petrochemical refinery in Mongolia which comes in the backdrop of China’s BRI [9]. As India and Myanmar share ties in terms of trade, investments, defence and most importantly security and for success of the AEP the key happens to be Myanmar having a common border with Arunachal Pradesh, Nagaland, Manipur and Mizoram. The present India-ASEAN closeness is relatively low. By announcing such projects in Myanmar and Mongolia GOI’s focus is to invite economic engagement and to build strong economic partnership with Southeast and East Asia and other Indo-Pacific countries. This will, in turn, help GOI by removing economic isolation of its North East states. GOI is working in succession of the implementation of international law to establish peace, stability and security in its border region. Lastly, it is utmost important for