Nepal Oil Corporation owes India Rs 3 billion, it is losing Rs 580 million a month, and bankers are getting reluctant to lend it any more money.
But this week, the state-owned oil monopoly got a rare piece of good news: a government task force has recommended that the costs of petroleum products reflect international prices. New Delhi also told Prime Minister Deuba during his recent visit that it is not happy with having fuel it exports cheap and duty-free to Nepal being smuggled back into North India.
Which means NOC now has enough reasons to raise prices. All it needs is the green light from the politicians. "Our recommendation is to allow market forces to determine prices with the rise and fall in the international market," says National Planning Commission member and task force co-ordinator, Yuba Raj Khatiwada. "We do not want this issue to become a political football because both the corporation and the country will suffer in the long run."
But given the political sensitivity of the issue, petroleum prices are unlikely to be raised sharply. The task force has recommended an independent non-governmental monitoring body enforce legislation, even though a similar body for electricity pricing has been a fiasco. The tariff commission to fix power prices has not been able to function independently and all it does is endorse government decisions, often under donor pressure.
But petroleum is different. In the past 15 months, international fuel prices have gone up by 75 percent, but remained nearly the same in Nepal. NOC borrowed Rs 2 billion from Rastriya Banijya Bank and Standard Chartered Bank last month to tide over its Rs 580 million monthly deficit and is still looking for other lenders to pay this month's bills. Some banks, including Nabil, were willing, but NOC wanted to borrow Rs 3 billion but the bank could only lend Rs 600 million.
Last month's fuel price hike hasn't helped much. After the rise, losses have come down from Rs 580 million to Rs 406 million a month. "The hike was too little," said Hariom Dhoj Joshi, Officiating Managing Director of NOC. "Things will not change until we can take prices to international levels, or at least put it on par with India."
With the four-party anti-'regression' alliance looking for any excuse to resume its street agitation, it would be suicidal for the shaky Deuba coalition to raise fuel prices again. But under intense pressure from India, and forced to rescue NOC from bankruptcy, the government seems ready to bite the bullet and at least raise prices to the same level as India and prevent cross-border smuggling.
NOC officials admit that a significant quantity of Nepal's subsidied kerosene and diesel goes back into India because prices are higher across the open border. Even with the recent price hike in Nepal, there is a Rs 6 price differential for a litre of petrol, Rs 9.5 for diesel and Rs 7 for kerosene.
The Indian government is worried about loss of revenue along its border with Nepal. "India's notice to the NOC on the eve of Prime Minister Sher Bahadur Deuba's visit to New Delhi seems to have been a reminder to Nepal to get its act together," one senior source told us. "It was a pointed warning if you don't raise prices in Nepal we will slap a tax to make it more expensive for you to import oil."
An Indian Embassy statement did immediately follow the notice saying that the duty-free export of oil to Nepal would continue, and Indian officials said the news was "an ill-timed misunderstanding caused by lack of coordination between various departments in Delhi". Even so, the letter seems to have done the trick by sending the message to the prime minister's delegation as it was about to leave for India.
Pipeline in the pipeline
One of the main accomplishments of Prime Minister Sher Bahadur Deuba's visit to New Delhi last week was the agreement between the state-owned oil corporations of the two countries to fix a pipeline from the border to the depot in Nepalganj.
The 35km pipeline will cost Rs 500 million and be a 50-50 India-Nepal partnership which bypasses the current leaky tanker route from Indian refineries to Birganj. Much of the adulteration and leakage of diesel, kerosene and petrol in Nepal is said to occur in the Raxaul-Amlekhganj stretch.
"The project will help us reduce leakage and pilferage significantly and address the problem of adulteration," says Commerce Secretary Dinesh Chandra Pyakurel (pictured). "We will be able to recover the cost of the project within the first five years, and after that consumers will also feel the relief of having to pay less for petroleum products."
The construction of the project is expected to begin soon and it will take two years for completion. Officials say the pipeline will pay for itself within four years because of saved transportation cost, and even quicker if leakage and adulteration is taken into account.