Refineries and OMCs to fix monthly prices

ISLAMABAD: While protecting the guaranteed tariff for movement of diesel through pipeline, the petroleum ministry has decided to allow refineries and oil marketing companies to fix monthly prices of petroleum products despite opposition to the move by the Planning Commission, Oil and Gas Regulatory Authority (Ogra) and members of an experts’ committee.

According to a fresh summary, the ministry has also decided to allow refineries to charge 7.5 per cent deemed duty on locally produced diesel and kerosene, similar to the customs duty permissible to marketing companies on imported products.

Sources told Dawn on Sunday that the ministry had withdrawn two summaries earlier submitted to the Economic Coordination Committee (ECC) of the cabinet because of criticism of private members of the experts’ committee.

At a meeting on June 10, the petroleum ministry had accepted the members’ proposal that 7.5 per cent deemed duty on domestic production should be removed and the guaranteed tariff for transportation of products through pipeline abolished.

The sources said that the petroleum ministry issued notices on June 15 to the stakeholders, including members of the experts’ committee, to attend a hurriedly-called meeting the same day, but the private members could not attend it. However, no agreement was reached with the Planning Commission, the committee’s members and Ogra.

The Planning Commission categorically called for a phased deregulation of petroleum products, allowing the private sector to fix the prices of aviation fuels and light diesel oil in the first phase.

The commission and the private members also advised that in view of the Justice Bhagwandas Commission’s recommendations, the deregulation of petrol and high speed diesel should be deferred for the time being to prevent market abuse by refineries and OMCs. They also proposed abolition of inland freight equalisation margin under an Ogra-regulated regime to prevent market abuse.

According to the sources, Ogra expressed its inability to intervene in a deregulated environment unless the relevant law was changed.

A member of the committee said that the petroleum ministry had disregarded recommendations of not only the Bhagwandas Commission, but also of the Planning Commission and Ogra.

But the petroleum ministry’s summary expected be taken up by the ECC on June 29 claims that Ogra and the Planning Commission “agreed in principle with the proposals of deregulation of the IFEM and pricing of petroleum products, However, they suggested an effective role of Ogra”.It says: “The issue of removal of 7.5 per cent deemed duty on diesel was also discussed and considered not viable at this stage because of recent losses to the refineries and GoP revenue loss on import of HSD.”

The ministry has now proposed to deregulate the road and rail transportation of petroleum products which will reduce retail rates in major cities by 50 paisa to Rs2.5 per litre.

“However, for a transitional period of six months, Ogra will notify per litre freight rate to establish standard norms and mechanism and estimated transportation cost of IFEM for various locations.”

The summary says the pipeline component of IFEM for movement of HSD only will remain in the common freight pool because of “GoP volume and tariff guarantee for oil pipeline from Port Qasim to Muzaffargarh”.

It says Ogra will intervene if any violation takes place from refineries in allocation of petroleum products to OMCs and in case of misuse of freight rates.

But a committee member said Ogra could not intervene in market manipulation of prices or freight rates unless its law was changed.

The ministry has proposed to allow refineries and OMCs to announce on a monthly basis the ex-refinery and ex-depot sale prices of motor spirit, HOBC, LDO and aviation fuels on competitive basis.

The committee member said the past practice of the fixing of price by oil companies and refineries had led to probes by the National Accountability Bureau (NAB) and apex court’s intervention and the role had to be returned to the regulator.

The summary says that ex-refinery prices will not be more than average import prices of previous months. It says the ex-refinery prices of HSD and kerosene produced by local refineries will continue to be managed by Ogra in accordance with the existing formula, including 7.5 per cent customs/deemed duty on HSD. The OMCs’ and dealers’ margin on HSD will remain fixed at the existing Rs1.35 and Rs1.5 per litre.

The summary also calls for fixed margins for dealers and OMCs in absolute terms, assuming crude price at $62.5 per barrel. As such, the OMCs’ per litre margin will be Rs1.5 on petrol, Rs1.72 on HOBC, Rs1.58 on kerosene and Rs1.61 on LDO. The dealer margin on petrol and HOBC will be fixed at Rs1.87.

As opposed to Justice Bhagwandas report, the summary neither makes it mandatory for refineries not to use special reserves funds for meeting their revenue requirements nor fixes any deadline for sale of 0.05 per cent sulphur content diesel.

The summary says the refineries “will be advised not to adjust their losses against the special reserves accumulated since July 2002 and utilise the same on special projects i.e. hydro desulphurisation project to reduce sulphur contents in diesel from one per cent to 0.05 per cent”.

The ministry did not consider the Bhagwandas Commission’s recommendation for fixed GST.

The ministry has also recommended reduction in investment requirement for new marketing companies from Rs6 billion to Rs500 million to enable four influential parties to set up marketing firms, although 12 companies are already operating.

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