Wednesday, Nov 26, 2014

Petroleum ministry refutes CAG on pricing formula, says oil companies’ viability at stake

Oil marketing companies overcharged customers and collected additional Rs 26,626 crore between 2007 and 2012, said the national auditor. (Reuters) Oil marketing companies overcharged customers and collected additional Rs 26,626 crore between 2007 and 2012, said the national auditor. (Reuters)
Written by Amitav Ranjan | New Delhi | Posted: July 21, 2014 1:12 am | Updated: July 21, 2014 8:32 am

Refuting the claim of the Comptroller and Auditor General (CAG) that state oil firms were overcharging customers for petrol, diesel and LPG, the petroleum ministry has backed the current pricing formula saying that a shift to CAG-advocated export parity pricing (EPP) would render domestic refineries unviable and endanger the country’s energy security.

“The oil marketing companies are operating older and comparatively less complex refineries due to socio-political and economic reasons. Changing the refinery gate price on the basis of EPP would remove the customs duty protection to these refineries and render a majority of them unviable, adversely affecting the energy security of the country,” says a ministry paper on CAG’s claim.

The national auditor, in its report on the mechanism for oil pricing tabled in Parliament last Friday, said the oil marketing companies overcharged customers and collected additional Rs 26,626 crore between 2007 and 2012 by making people pay for imaginary charges such as customs duty.

This too has been challenged by the ministry on grounds of financial compulsions heaped on the oil marketing companies.

The ministry document says that after deducting the oil companies’ contribution of Rs 28,680 crore towards under-recoveries, Rs 15,900 crore paid as income tax and Rs 9,284 crore handed out as dividend in these five years, the net impact was a Rs 27,238-crore loss to Indian Oil Corp, Hindustan Petroleum  and Bharat Petroleum.

“Thus OMCs have made a notional loss and not a profit during 2007-12,” it says.

Net profit as percentage of revenue was below 1 per cent for all three oil marketing companies.

“This level of profit is too low to meet the growing capital expenditure requirements of the oil marketing companies and can adversely affect the energy security of the country,” it adds.

State firms are pricing fuel at a price equivalent to the landed price of the fuel as if it was imported after paying freight charges, insurance and customs duty.

“When the primary raw material (crude oil) which constitutes around 90 per cent of the production itself is charged on import parity basis, the product prices for refineries should also be based on the same principles of import parity,” argues the ministry.

The Rangarajan Committee in 2006 had recommended that some effective protection was required for refineries to insulate them from international price volatility and encouraging investment in modernising the refineries.

The alternative to promoting a robust domestic refinery sector, says the ministry paper, was to rely on product imports for which the international markets are thinner with fewer supply sources, thereby resulting in higher price fluctuations as compared to the crude oil market.

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