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Until 1998, an administered pricing mechanism (APM) determined prices in the Indian petroleum sector. The APM set prices of crude oil and petroleum products to ensure returns for exploration and production companies, refiners, and marketing companies. It consisted of a number of oil pool accounts through which products such as diesel, kerosene, and LPG were cross-subsidised through higher realised prices for other products, such as motor spirit and aviation turbine fuel.

Deregulation of petroleum sector prices was initiated because of a burgeoning oil pool deficit, a result of the government’s inability to pass on increased costs of crude oil through higher product prices, and the need to attract new investment. Deregulation of India’s petroleum industry, which started in 1998, involved the provision of adjusted import parity prices to refineries and partial rationalisation of the duty structure on petroleum products.

In 2002, the government announced the final step in the phased deregulation of the petroleum s3ector. Key points included: market determination of petroleum product prices; permission for private companies to distribute petroleum products; and the establishment of a regulatory board to oversee the sector.

Theoretically, with deregulation the petroleum sector, retail prices should move with international trends. However, socio-political factors might prevent frequent changes in previously controlled product prices, as petroleum products are for mass consumption. Oil companies would likely review retail prices, typically on a monthly basis, and revise prices accordingly. Extreme price shocks are unlikely, in our view. The government might intervene by lowering the excise duty if oil prices are very high. Also, Indian oil companies might only increase product prices to a limited extent, even when international prices are very high, and compensate themselves by limiting retail price cuts when oil prices fall significantly.

However, during the recent high crude oil price scenario, the government was forced to take a few steps backwards on reforms in the sector. Retail cooking and auto fuel prices have not moved in line with crude price increases; therefore marketing companies are largely incurring losses despite partial compensation through payments from upstream companies and government subsidy in the form of bonds.

The Oil and Natural Gas Corporation has bought equity stakes in oil fields in Iraq, Sudan, Libya, Angola, Burma, Russia, Vietnam, Iran, and Syria. Other Indian public-sector undertakings are involved not only in acquiring exploration and exploitation rights, but also in establishing sales outlets for Indian petroleum products and in offering a variety of technical services.

In the gas market, the Gas Authority of India Limited (GAIL) has started investing in liquefied natural gas (LNG) plants in Oman and Iran, and is building port facilities and pipelines in India to handl3e large imports. GAIL is also pursuing plans for direct pipelines from Bangladesh, Burma, Iran and Pakistan.

Oil And Petrochemical sector

Oil And Petrochemical sector-Organisation Chart

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