Cabinet may redo PSU refiners’ model to help IOC, BPCL, HPCL take on pvt sector peers like RIL, Essar

The Prime Minister Narendra Modi-headed Union Cabinet on Wednesday is likely to take up a proposal that would overhaul the crude procurement process for government-owned refiners- IOC, BPCL, HPCL and MRPL. The move is aimed to make the refiners more competitive like their private peers such as RIL and Essar Oil and take benefits of spontaneous buying of cargoes.

Sources told FE that the petroleum ministry has sent the final proposal for clearance from the Union Cabinet, which is likely to decide on it on Wednesday.

The petroleum ministry proposes to put in place an ‘integrated trading desk’ model and do-away with the tendering mechanism of procurement. The new model, already practised by global firms and private Indian refiners, could help in buying crude oil cheaper by nearly $3-5/barrel. Given the existing capacities of PSU refiners, their combined savings could be $3 billion per annum, said an official with one of the refiners.

Crude oil traded near one-month lows on Tuesday after a surprise fall in gasoline demand in the United States. Brent crude, the global oil price benchmark, was down 27 cents at $37.42 a barrel on Tuesday afternoon, close to a one-month low, reported Reuters. The commodity had already touched 13-year old sometime back.

In the new mechanism, integrated trading desk would be the platform to negotiate directly between the buyer and seller and also capture market opportunities such as buying distress cargoes.

The tender route approach for spot procurement currently adopted by PSUs restricts opportunities for quick decision making for buying and selling cargoes on perceived advantage. The trading desk approach involves traders continuously talking to market participants during the entire day. As and when opportunities arise, the traders can finalise deals without calling for tenders, said an official at a public sector refiner.

In May 2013, the Parliamentary Standing Committee also pointed out the need for better crude oil procurement mechanism. It said that PSU refiners should be given flexibility for carrying out negotiations including pricing, hiring ships and better terms on freight. In addition, the petroleum ministry should allow PSUs to procure certain percentage of their annual crude requirement through distress sale route, recommended the committee.

IOC, BPCL, HPCL and MRPL buy nearly 70-75% of their crude oil requirement via long-term deals, while remaining 25-30% is sourced from spot market, costing premium.

In the current mechanism, the PSU refiners would float the tender, receive offers, seek clarification, evaluate them and then approve the buying. This entire process takes time.