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PETROLEUM PRICING ASSOCHAM, 17 TH OCTOBER 2008 NEW DELHI

PETROLEUM PRICING ASSOCHAM, 17 TH OCTOBER 2008 NEW DELHI. S Thangapandian. PETROLEUM PRICING – JOURNEY SO FAR. Administered Pricing Mechanism (APM) Regime - Government control on all parameters of operation Assured returns on investment to Oil Companies

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PETROLEUM PRICING ASSOCHAM, 17 TH OCTOBER 2008 NEW DELHI

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  1. PETROLEUM PRICING ASSOCHAM, 17TH OCTOBER 2008 NEW DELHI S Thangapandian

  2. PETROLEUM PRICING – JOURNEY SO FAR • Administered Pricing Mechanism (APM) Regime - Government control on all parameters of operation • Assured returns on investment to Oil Companies • Under-recoveries / losses compensated by Government through Oil Pool Account mechanism administered by Oil Coordination Committee (OCC) • APM dismantling commenced in 1998 • APM for Refineries, crude producers and marketing of industrial products abolished in 1998 • Marketing of ATF deregulated in 2001 • APM for marketing of sensitive petroleum products (MS,HSD,SKO,LPG) dismantled in 2002 • OCC dissolved and Petroleum Pricing & Analysis Cell (PPAC) was formed in 2002 • Regulatory Board Recently formed : PNGRB • Currently regulating Natural Gas • Other petroleum products to be notified for control by PNGRB

  3. SALIENT FEATURES – APM DISMANTLING Market Determined Pricing Mechanism for consumer prices of Petrol & Diesel. Consumer prices for PDS Kerosene & Domestic LPG governed by the subsidy scheme Subsidy as on 1st April 2002 to be met through Consolidated Fund of India. Increase in cost price after 1st April 2002 to be passed on in the Retail Selling Prices. Government subsidy from Consolidated fund to be phased out in 3 years with corresponding increases in Retail Prices. Price of indigenous crude oil of ONGC/GAIL to be market determined New entrants, including private sector, will be allowed to market petrol, diesel, Aviation Turbine Fuel as per the Government Guidelines Whilst de-jure MS & HSD RSPs have been de-regulated, defacto these have continued to be decided by the Government.

  4. PRICING – POST APM ERA • Refineries: • Realisation on the basis of Import Parity Principle. • Based on Rangarajan Committee’s recommendations, Trade Parity pricing adopted for MS & HSD in June 2006 • Marketing: • MS, HSD, SKO (under PDS) & LPG (for Domestic use) not aligned with international prices • Pricing for all other products including ATF continue to be in line with international prices • SKO (PDS) & LPG (Domestic) • Consumer Prices of SKO & LPG were not revised as per the scheme. LPG price was marginally hiked and SKO price still remains at 2002 level.

  5. PRICING – POST APM ERA • MS & HSD • Consumer prices of MS & HSD revised in line with international prices till mid-2004. • In July 2004, Government introduced price band mechanism allowing oil companies to revise prices only with in a band (+/-10% of existing Domestic Prices). • The band mechanism never got implemented as the international prices breached the band in the very first instance. • Prices of petrol & diesel are revised on ad-hoc basis with burden sharing amongst various stakeholders.

  6. GAS PRICING TRANSITION • PAST • Pricing on cost-plus basis • 100% Government controlled and single price for all users • PRESENT • Mostly Government controlled (~ 70%), sectors such as Power and Fertliser • Variable prices ($ 2 – 18/ MMBTU) depending on the term arrangement with suppliers. 80-85% trade volumes are long-term contract driven • FUTURE • Free market pricing mechanism • Competition to Alternatives • Alignment with global trends PRICING – MOVING TOWARDS DREGULATION

  7. PRICING CONCEPTS IMPORT PARITY EXPORT PARITY FOB/ Premium FOB/ Premium Quality Adjustments Quality Adjustments Total of Above Ocean Freight (from AG) Insurance, Ocean Loss LC Charges/Finance Cost 20% Import Duties Import Wharfage Trade Parity Price (MS & HSD) TOTAL OF ABOVE 80% Import Parity Price (Other Products) 100%

  8. RETAIL PRICING - COMPONENTS 76% 54% How it adds up Prices in Rs/Ltr PETROL DIESEL SALE PRICE IN DELHI 0 4 5 3 2 6 6 8 BASIC (Crude, refining, custom duty) 2 7 2 6 3 3 3 5 1 3 0 3 EXCISE DUTY 7 5 7 1 44% 22% 0 8 0 4 STATE TAXES 1 2 4 4 0 0 0 0 0 5 FREIGHT 0 5 0 1 0 0 0 5 DEALER 6 3

  9. EFFECT OF TAXATION ON PRICING • There is a wide variation in Sales Tax levied on MS & HSD from state to state. • For example, the lowest and the highest sales tax rate on these products are as under: • Further distortion takes place through levy of Octroi and local surcharge by some states.

  10. EFFECT OF FREIGHT COST ON PRICING • Weighted average transportation cost results in higher than warranted prices at locations closer to the coastal refineries / storage points. Conversely prices at locations away from coastal refineries / installations are lower than warranted. • Following example shows virtually NIL transportation cost in Delhi prices: • MSHSD • Prices at Mumbai * 42.05 30.39 • Prices at Delhi * 41.12 30.10 • * Excluding Sales Tax and Local levies

  11. UNDERREALISATION/ RSPs All India Under realisation (before taxes & duties) Figures in Rs./Ltr. RSP status in Delhi The estimated annual under recovery at current level of RTP-RSP mismatch is expected to be ~ 150000 cr. for MS, HSD, SKO and LPG – as on 30th Sept’08

  12. BREAK-EVEN LEVELS $134/bbl $118/bbl $831/MT 105 Current $109/bbl Break-even $ 90/bbl 89 MS Break-even $ 78/bbl 66 HSD Break-even $ 313/MT 41 LPG Break-even $ 22/bbl 18 SKO Petrol Diesel SKO LPG Break even Crude Prices PRODUCT LEVEL FOBs Level of Prices basis 2nd Fortnight of Sep 08

  13. LOSS SHARING MECHANISM • IOC / HPC / BPC are only eligible for compensation of under recoveries (SKO PDS, Dom LPG, MS, HSD) • Private oil companies (Essar/RIL/SHELL) and other PSU marketing companies (ONGC-MRPL/NRL) do not get any compensation • Losses of 3 OMCs pooled together and quantum of upstream assistance & oil bonds decided by Cabinet committee on recommendation by MOP&NG • Upstream assistance: On instructions from MOP&NG, ONGC/GAIL/OIL offer discounts on Crude oil, SKO & LPG sold to OMCs • Oil Bonds: Oil bonds of specific coupon rate issued by RBI to Oil companies for partial compensation towards unabsorbed under recoveries.

  14. PATH FORWARD • RSP should fully reflect the change in RTP; government should have no role in determining RSPs. – Start with Dual Pricing.. • No artificial interference of regulatory bodies in fixation of RSPs. Creation of level playing field for all players. • The Regulator can ensure that Oil Marketing Companies do not increase RSPs arising from change in RTPs/TPPs beyond warranted levels. • A fixed Marketing Margin/Operating Cost element should be included in calculating RSPs (Operating costs can be minimised by optimal utilisation of existing transportation / storage & handling infrastructure). • Sales Tax rates across the states should be uniform. • CST and Entry Tax levied by some states should be abolished.

  15. PATH FORWARD (Contd…) • Local surcharge and Octroi should be abolished. • The concept of weighted average transportation cost should be done away with and the prices should reflect the true cost of transportation. • Subsidies on PDS Kerosene and LPG should be removed completely and an alternate system to provide relief to the target population should be worked out by the Government. • New entrants, including private players, should be permitted to market LPG (domestic & industrial) and Kerosene (non PDS).

  16. Thank you

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