They say Oil is Black Gold. They say cheap gas (petrol) made America what it is today. It is true. Having lived in America for about 3 years, as a student I had a car. I used to travel. Buy cheap fuel, spend on eating out. No place seemed distant. Leaving the home on the weekend, seemed so easy. American roads were always full of traffic. Cars, Cars and Cars. The economy of many places, maybe not exotic or historical as India was developed on tourism, large supermarkets (Discount Stores), I believed that cheap fuel made all this possible. If you can make people leave their houses, you can make them spend. When they enter any market, whether they like it or not they will spend, maybe on eating on clothes or something. This spending, allows businesses to make money, people to get employment. Retail is a very large employer and revenue generator.
Take away the cheap fuel, people travel less, they walk to nearby places, they walk into stores which are not innovative or effective and tend to buy less. So it makes me feel, if fuel was cheap and cars were readily available so many more people would be out of their houses, spending money, feeling good about. But ah, cheap fuel.
In India, the fuel market is heavily regulated. India produces 30% of the Oil it requires. The Indian Oil marketing PSU supply 98% of the Indian market. And what does the government do, it decides the prices of fuel to the consumers. LPG, Kerosene are subsidized to some extent, and all the fuel prices are decided by the government depending on their whims and fancy.
If I see the world wide oil market, prices of oil are going up. Due to increased demand and a very tight supply. This stems from unrest in Nigeria (a very large source of sweet crude), falling production in oil wells in the US and UK. Belligerence of Venezuela. Instability in Iraq, oil mafia in Russia and Saudi Arabia (who will not let the world know how much oil reserve they have). China, India, ASEAN are the world's booming economies, citizens starved of luxury are increasingly buying into whatever cars, bikes they can get hold off. Bigger cars, Bigger bikes. From 800cc cars to 1.6L cars, from 100cc bikes to 150cc bikes. These countries will drive demand for oil higher. Along with this the artificial fuel subsidy the government provides by keeping prices of petrol low will make matters worst.
How can one decide the price of a commodity when one does not produce it and requires it so badly?
Once I bought the stocks of Kochi Refineries, a excellent wealth creator, unfortunately I bought it at a time when there was a talk of it merger with BPCL, this would lead to good synergies as on marketed the fuel the other produced, this was good. But Oil prices rose very fast during that period. The government froze petrol prices, the loss in prices had to be borne by BPCL, which moved in the range of 40,000 crore. All the talk of Indian shining and 8.5% growth in GDP is meaningless without the account of such a staggering loss. Now who pays for this loss, we all do, when, very soon and some of which we already have.
Let me think, will I look for a oil well to cater to India's needs, if India tells me you have to pay a cess for the crude you produce. Will I put up a refinery if the government tells me hey you need to give discount. If the Americans are ready to buy what I produce at a price I want will I produce it for India or America.
As in any country there are smart people and there are unfortunate people. Lets look at the unfortunate people (Cause there are many of them). The first loser Kochi refineries, produces Petrol with a capacity utilization of 100%. Forced to give discount on petrol to BPCL and or marketers. Why it is just a service provider, sources crude deliver petrol. Second loser BPCL, HPCL, Indian Oil. Forced to sell petrol, diesel at a predetermined price. Why. They only provide a service. Final loser ONGC, told to pay cess on the crude they produce, second told to provide a discount to the down stream companies. All this for operating in India. Why would somebody invest money in such a place in the oil sector.
So the government, issues Oil bonds to BPCL, HPCL and IOC. Whose money is it. The Indian Tax payer. Bonds issued at 7% interest for 15 years. Told the same bonds are valued at 8% (neat profit for the PSUs). So this money gets locked at a very low interest rate for a long time to come. The government makes practically nothing. The companies can default on these bonds. The money is used to pay for working capital requirements (Imagine to run BPCL, I have borrow money), start new refineries (that in future will also give the same discounts). I fail to understand who will invest in India in Oil. When the country will require much more oil to fuel its growing middle class.
But there is a silver lining, there are bright and smart people who operate within the Indian constitution and make money and will make more money. Who but Reliance Industries. How do they make money. Its clear that Indian crude is difficult to get, first there very little, its not very good (sour crude) and third the government wants cess and other crazy things. Indian market heavily regulated and prices are kept low. So get the oil from abroad (Saudi Arabia), refine it here (Use cheap labour, lax environmental laws, cheap land) and export to the USA (no new refinery will be built in the USA anymore, due to environmental regulations, and high labour cost... the same with Europe). Ah ha, Bingo you got it right, now to add icing to the cake, a huge tax break for 15 years from the Indian government for setting something for Export only in a SEZ (The government wants dollars whose value is falling). Large breaks from Gujarat government for providing employment in the state. A win-win situation. All you need to do is to work hard, do your job and expect a windfall. Reliance Petroleum limited is this idea. Brilliant, simply brilliant. And it is going to prove it. At least I believe so.
BPCL now wants to put a refinery (Bina) on the same lines expect it is not for exporting crude, HPCL (Bhatinda)... Plus these companies have to sell cheap petrol. (a lose situation).
Another company Cairn Energy which made India's biggest oil find in 20 years is told to pipe its crude from Rajasthan to Mangalore through a special pipeline. It is a crazy idea. Then they are told OK, make a small refinery, finally they are told cut your production. Can you attract investment when you make such demands. If today the American government says OK let drill in Alaska, there will be a line of people with money. In India you say the same, people will want government tax breaks, special treatment.... We have to do it right. We have to clear all subsidies on fuel, we have to tell people it profitable to be invested in Oil and Gas in India and that you can make astronomically wealth. I agree we will feel the pinch of this but its worth it. As will any commodity a tight supply can be replaced by a over supply when there is adequate investment. We have to make that, the government does not have enough money to build refineries (These are expensive, cost $6B Reliance PL) and to find oil and gas. Till we have more than what we need. Then we export.
Why do we con over selves and the Indian people like this, make PSUs pay, people pay through tax and Private sector benefits from the loop holes. I firmly believe days are not far when there will be long queues for petrol and it will have to be rationed in this country. Unless ONGC finds a giant new oil well in India. Which is unlikely, esp when it is going to places like Sudan, Russia to buy stakes in oil wells. Totally unreliable countries.
Anyways, oil is a example of a perfect business whose time has come. Instead of profiting from it we choose to strangle the people who are making money. Though some smart people will still make money, many unfortunate people will get hammered.
Mark my words RPL is a winner.
Take away the cheap fuel, people travel less, they walk to nearby places, they walk into stores which are not innovative or effective and tend to buy less. So it makes me feel, if fuel was cheap and cars were readily available so many more people would be out of their houses, spending money, feeling good about. But ah, cheap fuel.
In India, the fuel market is heavily regulated. India produces 30% of the Oil it requires. The Indian Oil marketing PSU supply 98% of the Indian market. And what does the government do, it decides the prices of fuel to the consumers. LPG, Kerosene are subsidized to some extent, and all the fuel prices are decided by the government depending on their whims and fancy.
If I see the world wide oil market, prices of oil are going up. Due to increased demand and a very tight supply. This stems from unrest in Nigeria (a very large source of sweet crude), falling production in oil wells in the US and UK. Belligerence of Venezuela. Instability in Iraq, oil mafia in Russia and Saudi Arabia (who will not let the world know how much oil reserve they have). China, India, ASEAN are the world's booming economies, citizens starved of luxury are increasingly buying into whatever cars, bikes they can get hold off. Bigger cars, Bigger bikes. From 800cc cars to 1.6L cars, from 100cc bikes to 150cc bikes. These countries will drive demand for oil higher. Along with this the artificial fuel subsidy the government provides by keeping prices of petrol low will make matters worst.
How can one decide the price of a commodity when one does not produce it and requires it so badly?
Once I bought the stocks of Kochi Refineries, a excellent wealth creator, unfortunately I bought it at a time when there was a talk of it merger with BPCL, this would lead to good synergies as on marketed the fuel the other produced, this was good. But Oil prices rose very fast during that period. The government froze petrol prices, the loss in prices had to be borne by BPCL, which moved in the range of 40,000 crore. All the talk of Indian shining and 8.5% growth in GDP is meaningless without the account of such a staggering loss. Now who pays for this loss, we all do, when, very soon and some of which we already have.
Let me think, will I look for a oil well to cater to India's needs, if India tells me you have to pay a cess for the crude you produce. Will I put up a refinery if the government tells me hey you need to give discount. If the Americans are ready to buy what I produce at a price I want will I produce it for India or America.
As in any country there are smart people and there are unfortunate people. Lets look at the unfortunate people (Cause there are many of them). The first loser Kochi refineries, produces Petrol with a capacity utilization of 100%. Forced to give discount on petrol to BPCL and or marketers. Why it is just a service provider, sources crude deliver petrol. Second loser BPCL, HPCL, Indian Oil. Forced to sell petrol, diesel at a predetermined price. Why. They only provide a service. Final loser ONGC, told to pay cess on the crude they produce, second told to provide a discount to the down stream companies. All this for operating in India. Why would somebody invest money in such a place in the oil sector.
So the government, issues Oil bonds to BPCL, HPCL and IOC. Whose money is it. The Indian Tax payer. Bonds issued at 7% interest for 15 years. Told the same bonds are valued at 8% (neat profit for the PSUs). So this money gets locked at a very low interest rate for a long time to come. The government makes practically nothing. The companies can default on these bonds. The money is used to pay for working capital requirements (Imagine to run BPCL, I have borrow money), start new refineries (that in future will also give the same discounts). I fail to understand who will invest in India in Oil. When the country will require much more oil to fuel its growing middle class.
But there is a silver lining, there are bright and smart people who operate within the Indian constitution and make money and will make more money. Who but Reliance Industries. How do they make money. Its clear that Indian crude is difficult to get, first there very little, its not very good (sour crude) and third the government wants cess and other crazy things. Indian market heavily regulated and prices are kept low. So get the oil from abroad (Saudi Arabia), refine it here (Use cheap labour, lax environmental laws, cheap land) and export to the USA (no new refinery will be built in the USA anymore, due to environmental regulations, and high labour cost... the same with Europe). Ah ha, Bingo you got it right, now to add icing to the cake, a huge tax break for 15 years from the Indian government for setting something for Export only in a SEZ (The government wants dollars whose value is falling). Large breaks from Gujarat government for providing employment in the state. A win-win situation. All you need to do is to work hard, do your job and expect a windfall. Reliance Petroleum limited is this idea. Brilliant, simply brilliant. And it is going to prove it. At least I believe so.
BPCL now wants to put a refinery (Bina) on the same lines expect it is not for exporting crude, HPCL (Bhatinda)... Plus these companies have to sell cheap petrol. (a lose situation).
Another company Cairn Energy which made India's biggest oil find in 20 years is told to pipe its crude from Rajasthan to Mangalore through a special pipeline. It is a crazy idea. Then they are told OK, make a small refinery, finally they are told cut your production. Can you attract investment when you make such demands. If today the American government says OK let drill in Alaska, there will be a line of people with money. In India you say the same, people will want government tax breaks, special treatment.... We have to do it right. We have to clear all subsidies on fuel, we have to tell people it profitable to be invested in Oil and Gas in India and that you can make astronomically wealth. I agree we will feel the pinch of this but its worth it. As will any commodity a tight supply can be replaced by a over supply when there is adequate investment. We have to make that, the government does not have enough money to build refineries (These are expensive, cost $6B Reliance PL) and to find oil and gas. Till we have more than what we need. Then we export.
Why do we con over selves and the Indian people like this, make PSUs pay, people pay through tax and Private sector benefits from the loop holes. I firmly believe days are not far when there will be long queues for petrol and it will have to be rationed in this country. Unless ONGC finds a giant new oil well in India. Which is unlikely, esp when it is going to places like Sudan, Russia to buy stakes in oil wells. Totally unreliable countries.
Anyways, oil is a example of a perfect business whose time has come. Instead of profiting from it we choose to strangle the people who are making money. Though some smart people will still make money, many unfortunate people will get hammered.
Mark my words RPL is a winner.
