FROM THE TELEGRAPH OF 11 FEBRUARY 2006
At the PM’s
displeasure
In the third
week of January, Mani Shankar Aiyar was in Peking, trying to persuade the
Chinese that both China and India would save money if they bid jointly for oil
concessions across the world. He came back, and on Sunday the Prime Minister
took away the petroleum ministry from him. Manmohan Singh taught a lesson to
those disparaging commentators who had called him the Good Doctor and a weak
Prime Minister. He also showed that someone’s closeness to Rajiv and Sonia Gandhi
did not protect him from the Prime Minister’s privilege of appointing and
dismissing ministers. There is much gossip swirling around Delhi for nosy
reporters to ferret out. I shall not dwell on the personal aspect of this
fall-out. It was not maldroitness or misbehaviour that brought Aiyar down. He
tried to achieve something as petroleum minister; as a result he antagonized
forces that brought him down. He saw that India had no choice but to depend on
importing oil from a world which may run short of it, from countries that were
important players or pawns on the international chessboard and from an industry
that was cartelized and politicized. To secure oil in this world required India
to play power politics and to use its oil companies as arms of state policy. Unfortunately
for him, his spectacular forays did not fit into his captain’s game plan; so he
lost his cap.
The petroleum
ministry has in its stable the country’s largest and most profitable government
companies. Oil and Natural Gas Corporation produces some 200 million barrels of
oil, mostly offshore Gujarat, at a sixth of its market price; that means almost
$10 billion of profits without doing anything. The government imposes higher
import duty on products than on crude oil; that means equally effortless
profits for the refining companies. The petroleum minister is the ringmaster of
these companies, and can exercise enormous patronage through them. The story of
oil pump licences, stretching from Captain Satish Sharma to Ram Naik, is well
known; that is only the tip of the iceberg. But that patronage is not
unfettered. The oil companies have friends all across the political spectrum,
made with favours given in the past. So only a naïve petroleum minister would
tangle lightly with them.
As soon as Aiyar
walked into the petroleum ministry, he ran into squabbles between the oil
companies. The refining companies envy ONGC its easy profits. They would love
to snatch away a part of the profits, and are always arguing that ONGC should
sell them oil below international price; after all, they are its younger
sisters. They press home the argument by not paying ONGC promptly or fully. ONGC
gets fed up with these squabbles, and would like to get into refining and
access the final market for oil products. The refining companies have done
their best to prevent it from doing so, and have resisted its attempts to buy
into them. Finally, ONGC managed to enter refining by buying the Birla’s
bankrupt Mangalore refinery; but its refining capacity is still a fraction of its
crude oil production.
Aiyar thought
the solution to the companies’ squabbles was to merge them all into one
megacorporation. But managers abominate mergers since they reduce their chances
of promotion; so Aiyar ran into dogged opposition. Then he thought of the next
best thing – having two corporations, one upstream and one downstream. Since
that essentially meant ONGC keeping out of refining and distribution, it
resisted the plan. Stories surfaced of Aiyar trying to get rid of Subir Raha.
But the conflict was not over Raha; it was over the ministry reining in ONGC.
ONGC marshaled its friends across the government, and Aiyar had to abandon his
restructuring plans.
Then came the
rise in international prices of oil. The logical thing to do would have been to
pass on the rise to consumers. This was the objective of the reforms in the
1990s – that subsidies and cross-subsidies would be abolished. But just as the
government was about to abolish them, Ram Naik felt he had to do something
populistic, and retained the subsidy on kerosene, which he forced the oil
companies to give. After all, they were making huge profits.
Those profits
began to erode rapidly as oil prices rose in 2004. The oil companies asked to
be allowed to raise prices. Mani Shankar Aiyar had to carry their urgent pleas
to the Prime Minister and to the cabinet and argue for a price increase. Both
took their time; meanwhile, since petrol and kerosene prices are of public
interest, his trips to the finance ministry and the PMO got much publicity. If
there had to be subsidies, Aiyar would have preferred them to come from the
exchequer. But P Chidambaram dismissed the idea out of hand. The cabinet
approved inadequate price increases as slowly as it could; meanwhile, profits
drained out of the refining companies. That made them very unhappy; Aiyar was
the target of their wrath, though he was hardly the cause of their plight.
Aiyar tends to
get so active that he forgets to look around. But even he eventually realized
that in both oil company reorganization and oil price increases he had courted battles
he could not win. He decided to withdraw, but not before he had done himself
much damage.
He then took up
a campaign for which he thought he could not be faulted – a campaign to secure oil
supplies from abroad. Unfortunately, supplies from all major oil producing
countries close to India are sewn up. The Arab peninsula is largely under
American control, and Indonesia mainly supplies to Japan. The only two
countries where some uncommitted hydrocarbons are available are Iran and Burma;
Aiyar focused on these. As it happens, however, these countries have more gas
than oil to offer, and neither is our neighbour. Either their gas has to be
liquefied and shipped – with the attendant investment in liquefaction facilities,
terminals and tankers – or it must be compressed and piped. Onshore pipelines
are much cheaper than offshore – in the case of gas of Iran, a pipeline through
Pakistan would cost roughly $5 billion whilst an offshore one would cost twice
as much. So Aiyar started trying to persuade Pakistan and Bangladesh to either
build or allow pipelines through their territory.
He could not go
far in this endeavour without carrying the foreign policy establishment, and he
failed to do so. The Prime Minister opened an option of an alliance with the US
which would yield energy as a byproduct – oil from the Arab peninsula and power
from nuclear plants to be built with US technology. That offer was conditional
on India opposing Iran’s nuclear plans. So foreign policy torpedoed Aiyar’s
grand strategy – by blowing him out of the picture.
That was
unfortunate, for if we leave Iran aside, Aiyar’s plan of making India a hub of
oil storage and trade in the Indian Ocean, of securing our oil supplies by
creating an India-centred market, is a tantalizing one. It does not conflict with
the foreign policy establishment’s energy plans for India. I hope that it will
not be buried simply because it came from him.
