Proposal will benefit private players like Reliance Industries, Essar
A move by the Petroleum and Natural Gas Regulatory Board (PNGRB) to convert a sizeable section of the country’s oil pipeline network into common carriers has the state-run Indian Oil (IOC) perturbed. The PSU has not only termed the PNGRB’s proposal unfair but also questioned its legitimacy, arguing that the regulator’s remit doesn’t include regulation of captive oil pipelines.
If the proposal is implemented, IOC would be the worst-hit as about half of its pipeline capacity — 38.59 million tonnes of the 80 million tonnes to be precise — would have to be made available to competitors. This would inevitably dent IOC’s dominance in the markets connected by these pipelines.
PNGRB’s pro-competition policy would, however, be beneficial to players such as RIL and Essar Oil as they could cut transportation costs by using IOC’s pipeline network. These companies have hardly invested in creating the infrastructure to ferry their petroleum products within the country.
If a pipeline is categorised as a common carrier, a third party can use the line by paying tariffs to the owner of the carrier. According to notices issued by the PNGRB to oil companies last month, 20 of IOC’s pipelines, with a combined length of 5,929 km and capacity of 38.59 million tonne, two pipelines of GAIL India and one owned by BPCL would be made common carriers. The PNGRB had asked the stakeholders to give their views on or register their objections to the proposal.
In its response to the regulator’s notice, IOC has argued that its pipeline network played a crucial role in its business and was built by the company at its own cost.
The pipeline network being a captive system of the firm doesn’t entail a consumer and so, it can neither be dedicated to a single consumer nor used as a common carrier, feels IOC. “Crude oil and dedicated pipelines do not come under the purview of the PNGRB Act. Also, there is no mention of captive pipelines in the Act. So, PNGRB has no rights to issue these orders,” a director on the board of IOC said.
IOC maintains storage facilities at its depots across the length and breadth of India for storage and distribution. To evacuate products from refineries and to transport them to its marketing depots, IOC owns and operates the petroleum pipelines, which, it believes, are for its exclusive use.
“Each company has its model for transportation of products or raw materials. IOC is a commercial enterprise and these pipelines have been built keeping in mind strategic commercial interests of the company,” said the director, indicating that the PSU was averse to allowing any other firm to use its pipelines even on payment of transportation tariff.
IOC’s pipelines which exclusively cater to its own logistic requirements, are touted to be safe, environment-friendly and cost-effective mode of transporting its petroleum products compared to use of, say, roads and railways.
Although no separate revenue stream can be attributed to captive pipeline networks, IOC internally keeps a system where every department books margins on the supplies from upstream ones. “IOC has an unparalleled network of cross-country pipelines, 11,000 km plus with 80 million tonnes capacity. The pipeline business has a superior and stable annuity cash flow profile and generates superior returns. Pipelines contributed 38% to the FY15 Ebitda (earnings before interest, taxes, depreciation, and amortisation) with low capital employed,” Edelweiss Securities noted in a recent report. The government-owned company reported an Ebitda of Rs 10,147 crore, while the profit after tax was Rs 4,155 crore in FY15.
A move by the Petroleum and Natural Gas Regulatory Board (PNGRB) to convert a sizeable section of the country’s oil pipeline network into common carriers has the state-run Indian Oil (IOC) perturbed. The PSU has not only termed the PNGRB’s proposal unfair but also questioned its legitimacy, arguing that the regulator’s remit doesn’t include regulation of captive oil pipelines.
If the proposal is implemented, IOC would be the worst-hit as about half of its pipeline capacity — 38.59 million tonnes of the 80 million tonnes to be precise — would have to be made available to competitors. This would inevitably dent IOC’s dominance in the markets connected by these pipelines.
PNGRB’s pro-competition policy would, however, be beneficial to players such as RIL and Essar Oil as they could cut transportation costs by using IOC’s pipeline network. These companies have hardly invested in creating the infrastructure to ferry their petroleum products within the country.
If a pipeline is categorised as a common carrier, a third party can use the line by paying tariffs to the owner of the carrier. According to notices issued by the PNGRB to oil companies last month, 20 of IOC’s pipelines, with a combined length of 5,929 km and capacity of 38.59 million tonne, two pipelines of GAIL India and one owned by BPCL would be made common carriers. The PNGRB had asked the stakeholders to give their views on or register their objections to the proposal.
In its response to the regulator’s notice, IOC has argued that its pipeline network played a crucial role in its business and was built by the company at its own cost.
The pipeline network being a captive system of the firm doesn’t entail a consumer and so, it can neither be dedicated to a single consumer nor used as a common carrier, feels IOC. “Crude oil and dedicated pipelines do not come under the purview of the PNGRB Act. Also, there is no mention of captive pipelines in the Act. So, PNGRB has no rights to issue these orders,” a director on the board of IOC said.
IOC maintains storage facilities at its depots across the length and breadth of India for storage and distribution. To evacuate products from refineries and to transport them to its marketing depots, IOC owns and operates the petroleum pipelines, which, it believes, are for its exclusive use.
“Each company has its model for transportation of products or raw materials. IOC is a commercial enterprise and these pipelines have been built keeping in mind strategic commercial interests of the company,” said the director, indicating that the PSU was averse to allowing any other firm to use its pipelines even on payment of transportation tariff.
IOC’s pipelines which exclusively cater to its own logistic requirements, are touted to be safe, environment-friendly and cost-effective mode of transporting its petroleum products compared to use of, say, roads and railways.
Although no separate revenue stream can be attributed to captive pipeline networks, IOC internally keeps a system where every department books margins on the supplies from upstream ones. “IOC has an unparalleled network of cross-country pipelines, 11,000 km plus with 80 million tonnes capacity. The pipeline business has a superior and stable annuity cash flow profile and generates superior returns. Pipelines contributed 38% to the FY15 Ebitda (earnings before interest, taxes, depreciation, and amortisation) with low capital employed,” Edelweiss Securities noted in a recent report. The government-owned company reported an Ebitda of Rs 10,147 crore, while the profit after tax was Rs 4,155 crore in FY15.
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