The state monopoly in the country’s energy market pegged with limited resources and traditional setup seems to be hindering the much needed furtherance of the sector. With a number of infrastructure projects and purchase of vehicles, especially private ones, increasing significantly in the past few years, the availability of petroleum products have remained a tiring affair in numerous occasions.
The Nepal Oil Corporation (NOC), the sole importer and distributor of petroleum products in the country, constantly struggles to fulfill the market demand. From policy issue to inadequate infrastructure, the NOC seems at the crossroads without proper vision to tackle market issues.
Current Scenario The market for petroleum products in the country, according to NOC, has been increasing at an average annual rate of 20%. This means, the import of petroleum in the past decade is getting doubled every five years. Industry insiders say that the amount will further increase in the days to come as the country seeks to make significant efforts to embark on a development journey.
According to a recent macroeconomic report of Nepal Rastra Bank (NRB), the country’s trade deficit widened by 26.7% in the fiscal year 2017-18 to Rs 1,161.63 billion following increase in imports. Petroleum products remained the biggest contributor for the ballooning trade deficit.
As per Central Bank’s data, import of petroleum products surged 43.1% to Rs 170.13 billion in the previous fiscal year. Likewise, imports of vehicles and spare parts also rose by 36.1% to Rs 105.97 billion.
In a rough estimate, there are around 1,800 gasoline stations across the country. Of the total, Kathmandu is estimated to have around 170-180 refueling centers. Industry insiders claim that it costs at least Rs 250 million for setting up a single station.
While the market for petroleum products has numerous issues that need to be dealt with, the one that seems alarming is lack of storage space for imported fuel. The sole importer and distributor of petroleum products in the country - NOC - has limited storage that can fulfill national demand of petrol just for five days, diesel for eight days, and aviation fuel for 10 days.
This means, there is no alternate to shipping petroleum products from the southern neighbour India and fulfilling market demand on day to day basis.
End of state monopoly, the only solution says private sector The country’s private sector is of the view that there is no alternate to ending state monopoly in petroleum imports and sales if the government is willing to manage the sector efficiently. According to Lilendra Prasad Pradhan, President of Nepal Petroleum Dealers’ Association, there is need for roping in the private sector in the business to make NOC competent.
“We feel that we are dealing with a government body not a business association while dealing with NOC,” Pradhan said. “If we are to make significant strides in better managing the petroleum market, there is no alternative to reforming the state owned agency.”
Pradhan added that the involvement of the private sector in the distribution chain is getting increasingly necessary as rate of return from petroleum business is getting squeezed. Operation of around 1,800 gasoline stations across the country, according to him, has reduced profitability as sales volume of individual station has been severely impacted and sales margin offered by the NOC isn’t adequate.
The private sector also feels the need for proper identification. “Political leadership should be clear whether petroleum product is a political tool or economic tool,” Pradhan said, adding that the market needs to be open for all stakeholders if it is an economic tool. He added that the government can also restructure NOC by allocating shares to the general public and stakeholders in the business.
The government, which had allowed private players in petroleum business in October 2015 decided to roll the decision back after nine months in 2016.
Private sector stakeholders, however, accuse NOC of foul play as government agency distributes petroleum to gasoline stations while also making direct sales to big infrastructure projects as well as factories. Pradhan feels this reduces the profitability aspect for the private sector who are struggling to make decent profits. “The importer and sole distributor should not indulge in retail sales. This further downsizes the scope for the private sector,” he added.
NOCs never ending struggle The sole agency responsible for imports as well as distribution of petroleum products in the country says it is struggling to make earnings even though it has absolute monopoly in the market. The fluctuation in the international market as well as appreciation of dollars vis-à-vis Nepali currency, according to the state agency, has made it difficult for the agency to maintain profitability.
“It is a thankless job,” said NOC spokesperson Birendra Goit. “We are constantly bothered about making efficient supplies and reducing public woes. The market can only see the results which are difficult to achieve considering the constraints.”
According to Goit, the country is fully dependent on petroleum supplies via road transportation which is why it is difficult for them to meet market demand. “A simple incident in the road can create acute shortage in the market,” Goit said adding that the NOC has no control over such phenomena. “Moreover, road shipment of petroleum is costly compared to transportation via pipeline or railways.”
The NOC says that a huge portion of their hard work is consumed by worrying about getting the petroleum loaded trucks to major cities, especially Kathmandu on time.
Though the government has signed an agreement with India in 2015 for the construction of 69-km Amlekhgunj-Raxaul oil pipeline, the development has remained slower than expected with just 13-km pipeline laid as of July 2018. Nepal and India have agreed to rush the project and aim to complete it by June 2020. The NOC has stated that the oil pipeline has a diameter of 10.75 inches and will transport 2 million litres of oil daily. However, the daily fuel requirement of the country stands at around 7 million litres per day indicating that the project too won’t be an overall solution.
The state-owned petroleum marketer seems positive over the idea of roping in the private sector to facilitate efficient distribution mechanism. “The decision, however, has to be made by the government,” Goit said adding that the NOC has no apprehension given it commands significant expertise and experience in the oil distribution market.
Diversification of petroleum imports: Easier said than done The country’s petroleum sector is not just mired by the monopoly of the state but also the import destination. Nepal is solely dependent on India to fulfill its petroleum need. The country had to reel under severe petroleum crisis following unofficial economic blockade imposed by India in 2015. The blockade that was imposed months after Nepal witnessed Gorkha Earthquake that killed around 9,000 people and damaged properties worth billions showed vulnerability of Nepal in terms of dependency of energy.
The acute shortage of petroleum that prolonged for more than four months came as an eye opener. Subsequently, Nepal signed a historic oil trade deal with China in October 2015, ending a four-decade supply monopoly of the Indian Oil Corporation.
The agreement with China, however, remained just a symbolic gesture from Nepal to show its urge of diversifying import sources. Geographic difficulties and lack of proper connectivity prevent Nepal from realising its goal of diversifying imports source.
Industry insiders say that there is no alternate to bettering supply mechanism from India at present. “Nepal can now import 30% of petroleum from sources other than Indian Oil Corporation,” Goit said. This is due to unavailability of infrastructure. He added that there is a need for constructing pipelines for obtaining fuel from the northern neighbour.
Likewise, Pradhan feels that the Chinese depot is further from the bordering region of Nepal making it impractical. “There will be price issue as transportation cost will be significantly high,” Pradhan said. “Moreover, the route which is supposed to be used for petroleum import remains closed for four to five months each year due to heavy snowfall.”
While importing fuel from China seems impractical currently, the commitment from the northern neighbour in establishing petroleum products exploration centre in Nepal during Prime Minister KP Sharma Oli’s state visit in June 2018 seems optimistic. In line with the agreement, the China Geological Survey has proposed to drill at six to seven locations to determine the quantity and test the quality of the oil deposit in several places in the first phase. The northern neighbour is also expected to help Nepal increase its petroleum storage capacity.
Alternate Energy: The Future While efficient management of available resources and upgradation of needed infrastructure seems to be a must to mitigate challenges in present times, industry insiders suggest there is no alternate to exploring potential of alternative energy sources. Given the fact that Nepal is rich in terms of water resources, the country should look for hydroelectricity to replace fossil fuel consumption, they say.
Moreover a number of countries have been making policy decision of banning fossil fuel operated vehicles in the near future. India, the only country making supplies of petroleum to Nepal, too isn’t an exception. The southern neighbour announced in 2017 that it will start imposing ban on sales of fossil fuel operated machines starting 2030.
“We should be alarmed and need to work on war-footing for ensuring availability of alternative energy sources,” Pradhan said. “If India itself is looking to reduce petroleum consumption, we should foresee the supply scenario.” Apart from hydroelectricity, the country should also root for solar energy, experts suggest.
