Petro Politics In Nepal: Charlotte Benham

Among landlocked and least-developed countries, Nepal has a unique position when it comes to import and export exchange. With regards to petroleum products, Nepal is especially secluded from the international market: there are no private companies to provide competition. Because of Nepal’s 50 years of dependency on IOC’s goodwill, greater consideration should be given to the larger context of IOC when considering current obstacles to the delivery of products to Nepal. In addition to the political perspectives that have been given much attention, there are other push-and-pull factors that may influence the flow of petroleum products from India to Nepal.

 

Since the 1974 bi-lateral agreement, the Indian Oil Corporation (IOC) has been the sole supplier of petroleum-based products to Nepal. Additionally, the Nepal Oil Corporation (NOC) has also served as the sole receiver and distributor of these products in the country since that agreement was signed. A part of this initial agreement was the prohibition of Nepal purchasing products from other sources. This agreement has been renewed every five years, with amendments being made in 2002, 2007 and 2012, but none making changes to enable Nepal to make potential agreements with other nations or private companies regarding the purchase of petroleum products.

 

Neglect

In the renewal of the IOC-NOC agreement in 2002, IOC requested NOC to establish contracts with crude oil supplying countries to purchase their raw materials to be imported to India for refinement. Despite this, Nepali government officials and NOC employees have neglected this one avenue for making a connection outside of India. Government officials were in contact with their counterparts in Egypt, Iraq, Yemen and Malaysia; however, no developments came from these communications.

 

The agreement signed in late August 2015 for the construction of an underground pipeline from Raxaul to Amlekhgunj further confirmed NOC’s dependency upon IOC for the responsibility of finding, purchasing, processing and transporting petroleum products to Nepal. The MoU dictates that India will cover over two-thirds of the cost of construction in exchange for IOC being the sole supplier of petroleum products in Nepal for at least the next 15 years. While the pipeline does mean smaller transportation costs for NOC, it also seals the fate of Nepal’s complete reliance on IOC.

 

With each new agreement, amendments were made reflecting negotiations between IOC and NOC regarding the pricing of the finished products being imported into Nepal. Prior to 2002, NOC was responsible for all costs related to the purchasing, transportation and refining of crude oil. This included marketing and profit margins for IOC as the sole supplier and refiner. The 2002 agreement restructured this pricing system, however, the costs covered were, overall, very similar.

 

One thing that did change was connecting the price of Nepal’s petrol products to the international market through the establishment of import parity pricing (IPP). Following this method, IOC treated products going to Nepal as it did those being sold in the domestic market by fixing the price every 15 days based on international market export prices for each type of product being sold. In 2007, IOC made concessions regarding pricing in order to encourage NOC to both pay back previously accrued expenses and cover current purchases. IOC waived Indian customs duty and gave NOC a discount of Rs. 300 per kiloliter on all finished petroleum products. In exchange, NOC was to pay for current purchases and Rs. 240 million on a monthly basis in order to clear its debts.

 

NOC was able to repay its debt to IOC in July 2015, but it was not because of this repayment scheme. Instead, this was due mainly to large changes in the pricing of petroleum products in the international market. The prices of crude oil have decreased by 43% in the last year and those for finished products have similarly declined. NOC is able to buy its products from India based on international prices that are updated every 15 days and, as such, is enjoying the benefits of the current market.

 

When announcing that the Corporation had cleared its debts with IOC, Gopal Bahadur Khadka, managing director of NOC, reported that the organisation was making a monthly average profit of Rs. 1.20 billion in 2015. While NOC has used some of this money to pay off debts with IOC and other state-owned agencies in Nepal, it has also used the money to establish a price stabilisation fund. The fund’s purpose is to put money in reserve in order to protect consumers when higher prices hit, but at times like the present, it also means that consumer prices are decreased by only up to 2%. The media put out the question in June asking if NOC would behave as it did in 2008/9 when, after making an annual profit of Rs. 3.16 billion, it distributed over Rs. 1 million in bonuses to its employees.

 

IOC, on the other hand, is facing multiple issues at the same time, only one of which is its position in the international market. Since prices fell, India has been reconsidering its long-standing contracts with OPEC for crude oil supply that locked the Corporation into a certain annual price. On November 3, 2015, IOC published its quarterly report, citing a large part of its more than INRs. 3 crore losses in July to September from paying a price for crude oil that is far more expensive than market prices for the finished products. In order to resolve its losses due to market changes, IOC has sought out on-the-spot purchases from a range of countries in Africa, Latin America and Middle Eastern non-members of OPEC. These kinds of shifts do not happen quickly; however, IOC still relied on OPEC supplies through locked-in prices for 63% of its crude oil in 2014.

 

Changes in domestic policies have also taken a toll on IOC. Modi’s push for the divestment of state-owned agencies in order to encourage more private competition in the Indian market forced IOC to put 10% of its stock up for sale. Ministries have requested that IOC use its profits meaningfully, assuming that cheap petrol products means IOC is making more money than usual. The Corporation has been ordered to build up an emergency reserve supply and make monetary contributions to social security schemes.

 

While the Government of Nepal (GON), since 2002, has made movements towards introducing competitors to the Nepal market, it has also, for the last 20 years, pinned its hopes on India’s donation for the Raxaul-Amlekhgunj pipeline. Ironically, it was Modi who set the ball rolling in 2014 which led to the pipeline agreement in late August. Indian officials have emphasised in the past that the relationship between IOC and NOC is neither one of politics nor charity, it is a commercial agreement. As such, when a business such as IOC is making large losses while NOC is profiting from its resources and labour, a cost-benefit analysis immediately raises suspicion.

 

Supplying NOC with finished petrol products is simply not profitable at this time for IOC. Nepal must move beyond its focus on India and politics to develop a fuel plan that potentially includes both state-owned and private suppliers at a variety of locations. GON must establish its independence in dealing with other countries by making pro-active connections based on mutual commercial exchange. The recent MoU signed between NOC and state-owned PetroChina is very similar to that with the IOC in that it releases the responsibility of purchasing, refining and transportation of petrol products to the Chinese government.

 

Opportunity

GON must also seek to invest in developing the internal independence of the country through building up the manpower and infrastructure capacity of petrol-related activities in order to become a more equal partner to those it signs agreements with. What has been interpreted as a punishment being given out by Indian politicians could be taken as an opportunity for Nepal to develop itself economically.

(Prepared by Benham, an M.S. Ed at TESOL, & Marie Busse, an intern with FES-Nepal Office)

 

 

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