Petroleum pricing needs reform and transparency

CAG in its recent report said fault in fixing price gave oil firms Rs. 50,000 crore gain
 Contrary to the popular belief that oil marketing companies (OMCs) make huge losses on sale of petroleum products that are subsidised by the government, the audit watchdog Comptroller & Auditor General (CAG) of India claims they have made gains worth ` 50,513 crore between 2007 and 2012.
According to CAG, “The present pricing mechanism of major petroleum products provides for a higher compensation to the refiners. This has not translated into technical advancements and efficiency of the PSU vintage refineries to the desired level. The pricing policy also benefitted private/stand alone refineries by way of compensation for domestic supplies lo OMCs at rates higher than their export realisation.”
It adds, “OMCs have been unable to control their marketing expenditure lo remunerative levels impacting profitability. However, the manner and time frame in which the compensation pertaining to under-recoveries was being received adversely affected cash flows of OMCs along with attendant ill effects.”
The pricing mechanism, including notional import related expenses such as freight, insurance, custom duty etc are not actually incurred in production of refined products in OMC refineries. However, being included in the pricing methodology or price build up, they form part of the refinery gate price (RGP), which refineries are compensated.
“Addition of these notional elements had the effect of increasing the refinery gate prices for refined-regulatedproducts processed in OMC refineries by  Rs.  50,513 crore,” said the CAG.
The notional charges are insurance charges, letter of credit charges, ocean loss, wharfage charges, and basic custom duty, among others (table 1). Out of the  Rs. 50,513 crore, the most significant element is the custom duty which accounts for 56 per cent (Rs. 28,544 crore) of the total impact.
Even after deduction of relevant expenses incurred in import of crude oil during 2007-12, OMCs ought to have benefitted by  Rs.  26,626 crore ( Rs.  50,513 crore from table 1 minus  Rs. 23,887 crore from table 2).
OMCs uplift petroleum products from standalone or private refineries in order to fill the gap between production and domestic requirement at refineries import-linked prices (RGP). Private refiners, however, export balance petroleum products at a price lower than the price at which the OMCs buy from them.
Procurement at trade parity price (TPP) or import parity price (IPP) affords an undue benefit to private refiners, which was estimated at  Rs. 667 crore on HSD (high speed diesel) in only one year, i.e. 2011-12. The benefit to stand alone PSU refineries on the same count was  Rs. 1,428 crore during 2011-12, CAG observed.
CAG also pointed out that pricing mechanism at the refinery gate was intended as an incentive for upgrading the technology of existing refineries and to attract investment in the refinery segment for improvement of efficiencies. “While OMCs have mode some investments in their existing refineries for technology up-gradation, study of a sample indicates that there is still a significant gap in the performance of these refineries and there is a need for further technology upgradation,” it said.
So, the time has come to review the existing methodologies. Apart from recommending a “transparent burden sharing mechanism”, the CAG has asked the government to ensure that the pricing mechanism does not unduly benefit private refineries through the existing practice of compensation. 

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