Nepal’s biggest import item in terms of value is petroleum products.

In 2018-19 the country imported petroleum products worth Rs216 billion, up from Rs53.30 billion in 2009-10.

The sole importer and distributor of the commodity is the state-owned Nepal Oil Corporation. In the fiscal year 2018-19, the corporation made a net profit of Rs7.5 billion on oil imports. It paid Rs63.85 billion in taxes alone to the government.

The corporation’s profit has been gradually increasing since 2014 when the automatic pricing mechanism was introduced as per which the price of petroleum products in the country goes up or down based on international prices rather than the government fixing the prices as was the system earlier.

Since then lines at petrol stations that were a common sight, as imports would be curtailed to lessen losses, have disappeared.

Nepal Oil Corporation was once a chronic loss maker. The corporation’s financial position started to weaken in the fiscal year 2002-03 when world petroleum prices went into an upward spiral.

Oil prices peaked at $147 per barrel in 2007. Falling prices in 2014 and the automatic price mechanism helped improve its financial health. Brent crude fell to $27.67 a barrel in January 2016—the lowest since 2003.

In 2015-16, the company announced it had finally become debt-free after 14 years. Its debt had swollen to Rs36.87 billion in January 2015.

The corporation paid off all the loans in one and a half years, thanks to falling oil prices in the international market and the new pricing mechanism.

At the height of the scarcity of petroleum products in the country, the government had mulled deregulating the oil market to allow the private sector to import and distribute it.

In 2010, too, the Commerce Ministry had even tabled a new bill in Parliament, but it was sent back for further homework and consultations. And with the frequent changes in government, the law never became a priority.

But now the government is once again gearing up to enact a new petroleum law to deregulate Nepal’s lucrative oil market.

On January 13, the Cabinet gave an approval in principle to the Ministry of Industry Commerce and Supplies to prepare a draft bill of an integrated petroleum law, which will supersede the Nepal Petroleum Act-1983.

Prem Lal Shrestha, joint-secretary at the ministry, said it would prepare the draft integrated bill to suit the changing times.

“A committee will be formed to prepare the draft. The existing law will be studied and changes will be made as per the requirement,” said Shrestha. “It will take time.”

While ministry officials are tight-lipped whether the petroleum business will be deregulated, other knowledgeable sources have indicated that deregulation is the “sole purpose” of a new law.

Former officials at Nepal Oil Corporation said there had been several efforts to enact a new petroleum law to deregulate the oil market earlier but were unsuccessful.

“This is because the petroleum sector is such a business in Nepal where the private sector never makes losses because of the government’s subsidy policy,” said a former official at the corporation, who did not wish to be named. “Some lobby groups don’t want a new player in the market,”

A number of Indian companies have shown interest to sell petroleum in Nepal on different occasions.

In January 2013, India’s private petroleum giant Essar Oil, which is now Russian oil company Rosneft-owned Nayara Energy Limited, approached the Nepal government to supply petroleum products.

In January last year, the government, however, had baulked at deregulating the petroleum sector with Nepal Oil Corporation awash in cash despite there being a long-standing pledge to break the monopoly of the state-owned company.

The government monopoly even raised Rs11.95 billion in infrastructure tax in 2018-19 for the construction of the storage-type 1,200 MW Budhi Gandaki Hydropower Project, which the government plans to develop with its own resources.

Profits of the state-owned firm continue to grow, despite the end of chronic power cuts, which meant operation of diesel generators due to rising incomes of Nepalis and import of two-wheelers and four-wheelers.

Last January, Minister for Industry, Commerce and Supplies Lekhraj Bhatta had said that the government would not open up oil trade to the private sector.

“In view of national security, petroleum is sensitive. Therefore, I think we should not bring the private sector into the oil business,” he had said.

The government's reluctance to loosen its grip on the oil trade may have been prompted not only by the massive revenues but also because of the profits domestic sellers fear may go down, say industry watchers.

“Private traders’ fear of deregulation of the oil business made the attempts at a new law unsuccessful,” the former official said. “On the other hand, the existing guidelines of the Nepal Oil Corporation on petroleum transactions have failed to benefit consumers in terms of costs, quality and quantity.”

For example, Nepal Oil Corporation gives sales commission of Rs4.21 on a litre of petrol and Rs322.67 on a cylinder of cooking gas to sellers and bottlers.

“Even if the oil entity incurs losses, the private traders enjoy the sales commission. Each year, they demand an increase in the commissions, threatening to stop selling oil in the market,” said the former official.

The Cabinet decision last month is a U-turn from the government’s earlier position.

Experts say that deregulating the oil market will end the provision of providing the sales commission while it will also end subsidies given to the consumers.

But now the government has another rationale behind the need for a new law.

“Obviously with the country importing petroleum products worth more than Rs200 billion annually, the law governing the oil sector is outdated,” said Shrestha.

“Such a sensitive and growing business is currently governed by the working procedure prepared by Nepal Oil Corporation. Further, the rules are mainly related to security, sales and distribution and transportation and are prepared by the Nepal Oil Corporation itself.”

The existing Petroleum Act-1983 is focused on extraction and exploration of petroleum only and does not talk about the petroleum business.

Earlier attempts to deregulate the oil market had been half-hearted.

Subsequent to the Indian company’s approach, in March 2013 the government introduced the Petroleum and Gas Transaction (Regulatory) Orders 2013 which envisaged the opening up of the petroleum business to private investment, but it drew flak from gasoline dealers and experts over its effective implementation without related legislation.

Experts had expressed doubts that the regulatory orders will attract massive private investment and address potential risks. According to them, the orders are too weak to govern the petroleum business which has a high investment risk and is volatile in nature.

The order set up the minimum paid-up capital required for refining companies, petroleum trading firms, liquified petroleum gas importing firms and bottling plants at Rs20 billion, Rs10 billion, Rs5 billion and Rs50 million respectively.

Private companies dealing in petrol, diesel and kerosene were required to install a depot with a capacity of 20,000 kl while liquified petroleum gas bottling plants were required to have a stock capacity of 500 tonnes.

The “regulatory orders” would not guarantee investment of the private sector as the Nepal government can suspend their licence at any time.

The orders were subsequently suspended.

Purushottam Ojha, former commerce secretary, said it’s important that the government should introduce a new petroleum act as the business has grown massively, but there are still questions about pricing, quality and safety.

“The government should allow another private party to compete in the market and end the Nepal Oil Corporation’s monopoly,” he said. “As soon as there is competition, service standards will improve. If we want to bring the private sector in the oil business, the government should form a separate regulatory body that will oversee the quality and other safety issues.”

For example, according to Ojha, there is no third party insurance if a petrol tank explodes in the middle of the market or in a residential area.

“At present no one will take the responsibility for any mishaps,” said Ojha.

The first and foremost thing is to create an ecosystem of competition in the business, ensuring the quality of petroleum products, according to the former secretary.

Such is the monopoly that staff of Nepal Oil Corporation are given bonus whenever it makes a profit and this remains controversial as there have been several dozen Cabinet decisions in the past to inject cash into the state entity.

Chandika Bhatta, former executive director of Nepal Oil Corporation, agreed that the private sector needs to come into play to make the business more transparent and accountable towards the public.

“The government needs to be flexible to allow the private sector in the business,” he said. “The government should act as a regulating body and the distribution and sales part can be handled by the private sector.”