OIL is not well

Pramod Rijal, a resident of Kalanki works at the Institute for Integrated Development Studies (IIDS) - research wing of the Kathmandu University located in Dhumbarahi. He needs to travel almost 36 kms to reach office. Rijal toys with the idea of purchasing a car to make his commute easier but the expensive and ‘unpredictable‘ oil prices thwart his plan. According to his back of the envelop calculations, he needs to allocate around Rs 7,000 - 8,000 every month for fuel alone on a four-wheeler. This would add up to an annual expense of around Rs 100,000, a big sum for a middle class family. Auto loan schemes of banks and financial institutions (BFIs) and introduction of entry-level ‘economic‘ automobiles have pushed people like Rijal towards this temptation but high fuel prices, perennial shortage and sub-standard fuel are deterrents to this aspiration. Especially for Nepal, where around 22 percent of the total population is in this economic bracket and a huge segment gradually shifting to improved living standards, there is a huge market for four wheelers, yet many would resist the purchase. The monopoly of Nepal Oil Corporation (NOC) - a state owned entity - in fuel trading is largely responsible for the shortcomings. Though the government has allowed entry of private sector in petroleum business, petroleum trading has remained an untouched arena yet.

Automatic pricing mechanism

NOC had introduced automatic pricing mechanism in September 2014 to govern oil prices in the country as per international market rates. However, the mechanism remained defunct except for nominal price adjustments. Former Commerce Minister Sunil Bahadur Thapa had introduced the mechanism allowing NOC to increase or reduce oil prices up to two percent based on international market trend. Oil prices in international markets started a steep decline when the mechanism was introduced. Two percent‘s band was set because NOC was incurring huge losses and the government owned entity was passing on the burden to the consumers to repay its principal and interest on the loan. As the oil prices started to fall sharply in 2014, capitalising on the situation, NOC in the last two years cleared its entire loan of Rs 36.86 billion and generated profit of Rs 31 billion in fiscal year 2014-15 and 2015-16 fixing higher prices on fuel. As per the automatic pricing mechanism, NOC is required to revise oil prices every fortnight as it receives a price update every 15 days (On the 1st and 16th day of each month of the English calendar) from Indian Oil Corporation (IOC). IOC is the sole supplier of fuel to NOC.

Generating high profit

After clearing the loan burden, NOC has still been charging higher prices to its consumers in the name of infrastructure development tariff. NOC generates around Rs 910 million every month for infrastructure development, excluding profit of around Rs 900 million (as per the price list of August 1, 2016). Apart from this, the government through the fiscal budget of 2016-17 has levied Rs 5 per liter as customs tariff on import of every liter of petroleum product—petrol, diesel, and aviation turbine fuel—to mobilise resources to develop 1,200 megawatt Budhigandaki Hydropower Project. Similarly, other regular taxes like pollution tax, road maintenance tax, dealer commission, transportation cost, leakage and loss, administration cost of NOC, among others are adjusted in the market price. NOC has been passing the burden onto consumers for infrastructure development despite making a whopping profit of around Rs one billion in a month since fiscal year 2014-15. "After clearing the entire loan burden, NOC‘s monthly profit has surged to approximately Rs two billion in the near future, which is why NOC segregated a portion of its profit to fund infrastructure development activities to show forcefully that it is still making a modest profit,” said Prem Lal Maharjan, President of National Consumer Forum. "If NOC maintains the profit it has been generating in this month (August) for the entire year, the government owned entity will be able to make a profit of around Rs 24 billion in the current fiscal.” He opines that the government must intervene to pass on the benefit of decreased oil prices in the international market to consumers rather than allowing NOC to fix unfair prices of fuel in the domestic market.

Mediocre preparation to diversify import

The country is entirely reliant on neighbouring India to import fuel. The state owned petroleum supply monopoly has not made sufficient efforts to diversify import of petroleum products. Its plan to import one-third of the fuel the country needs from northern neighbour China has been shelved after signing an agreement with China National United Oil Corporation (Petro China) to import fuel in October last year. Earlier, NOC used to import crude oil from third country and refine it in India prior to bringing fuel into the country. However, NOC has been entirely dependent on IOC for fuel import since the last two decades. "Diversifying import is critical because it will work as a ventilator when there is any barrier,” said former Commerce Secretary Purushottam Ojha. Though Nepal, choked due to the Indian trade embargo preparation to import the fuel commercially from China has not borne any fruit even today.

Weak storage capacity

Weak storage capacity of NOC is also considered a reason behind the perennial shortage of fuel. Consumption of fuel in the country has almost doubled in the last 10 years. The state however has not improved its infrastructures based on the demand for fuel. The storage tanks in NOC depots, installed long ago, have a total capacity of 72,000 kiloliters of fuel, but the country consumes around 135,000 kiloliters of fuel every month. The Ministry of Supply (MoS) in the aftermath of fuel crisis, had instructed NOC to upgrade its storage capacity to at least 415,000 kiloliters to reserve e fuel at least for 90 days based on the current demand. Currently, the country consumes 985 kiloliters of petrol, 2,905 kiloliters of diesel, 50 kiloliters of kerosene, 330 kiloliters of aviation turbine fuel and 58,495 cylinders of cooking gas on a daily basis. Lack of adequate storage has resulted in serpentine queues of vehicles in front of the fuel stations whenever supply gets obstructed even for a day or two. Low storage capacity of NOC creates panic buying among public and creates further stress on supply management. Supply lines are usually disturbed because of natural disasters and also from human-induced incidents like protests and strikes among others. The Nepal-India 41 kms petroleum pipeline project is on stall since long. The Raxaul-Amlekhgunj pipeline project is also expected to be a lifeline in the supply of fuel and is estimated to be completed within 30 months from the beginning of construction but pre-construction works like detailed design, land acquisition and environmental impact assessment of the project have not been completed yet.

The need for systematic distribution mechanism

NOC‘s fuel distribution mechanism is another factor for prolonged crisis of fuel during supply disturbances. NOC gives more or less equal quantity of fuel to fuel stations at the core of Kathmandu valley and those located in the outskirts. It also distributes fuel only to government-owned fuel stations when a crisis occurs.

Weak monitoring and penalty system

Rampant adulteration and black marketeering of fuel and tampering of meters in fuel stations have flourished in the lack of efficient monitoring from the government. The government has authorised the Department of Supply Management and Consumer Protection for market monitoring. However, lack of requisite human resource in the concerned agency, lawlessness and the culture of impunity have contributed to zero progress. Ill practices like, black marketeering, adulteration, tampering of meters flourishes especially when there is low supply in the market.

Shift to the advanced quality fuel

Currently the country is importing Euro III grade fuel from India, however the source country has been supplying Euro IV grade fuel in its own metropolitan cities. Countries have opted for Euro IV fuel due to the lower carbon emission and extra mileage as compared to the Euro III grade fuel. NOC has been approaching IOC for supplying Euro IV grade fuel, according to Sushil Bhattarai, Deputy Managing Director of NOC. "As the supply agreement with IOC is going to expire from next year, we will renew our agreement with IOC on condition to supply Euro IV grade fuel to Nepal.” As per initial talks, IOC will supply Euro IV grade fuel from March 15, 2017, according to Bhattarai.