PETROLEUM PRICING

ASSOCHAM, 17TH OCTOBER 2008

NEW DELHI

S Thangapandian

• 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

PETROLEUM PRICING – JOURNEY SO FAR

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.

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.

• 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.

PRICING – POST APM ERA

• 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

GAS PRICING TRANSITION

PRICING – MOVING TOWARDS DREGULATION

PRICING CONCEPTS

FOB/ Premium

Ocean Freight (from AG)

Insurance, Ocean Loss

IMPORT PARITY

Quality Adjustments

LC Charges/Finance Cost

Import Duties

Import Wharfage

TOTAL OF ABOVE

FOB/ Premium

EXPORT PARITY

Quality Adjustments

Total of Above

80%

20%

Trade Parity Price (MS & HSD)

100%

Import Parity Price (Other Products)

RETAIL PRICING - COMPONENTS

How it adds upPrices in Rs/Ltr

PETROL DIESELSALE PRICE

IN DELHI5 0 6 2 3 4 8 6

2 7 3 3 2 6 3 5BASIC

(Crude, refining, custom duty)

1 3 5 0 3 7 1EXCISEDUTY

0 8 4 4 0 4 1 2STATETAXES

0 0 0 5 0 0 0 5FREIGHT

0 1 0 5 0 0 6 3DEALER

744% 22%

54% 76%

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.

  MS HSD

  State Rate (%) State Rate (%)

Lowest Orissa 18%Punjab & Haryana

8.8%

HighestAndhra Pradesh

33% Mumbai 26%

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:

MS HSD

Prices at Mumbai * 42.05 30.39

Prices at Delhi * 41.12 30.10

* Excluding Sales Tax and Local levies

UNDERREALISATION/ RSPs

Particulars Petrol Diesel

Product Cost 30.70 35.98

Marketing Costs & Normative Margins 1.80 1.85

Total Costs 32.50 37.83

Realisation (before Taxes, Duties) 27.33 26.35

Under Realisation 5.17 11.48

Desired RSP 56.85 47.91

Current RSP 50.62 34.86

Desired Increase in RSPs 6.23 13.05

RSP status in Delhi

All India Under realisation (before taxes & duties) Figures in Rs./Ltr.

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

BREAK-EVEN LEVELS

$109/bbl

Petrol

$118/bbl

Diesel

$134/bbl

SKO

$831/MT

LPG

Break-even $ 90/bbl Break-even

$ 78/bbl

Break-even $ 22/bbl

Break-even $ 313/MT

Break even Crude Prices

MS

SKO

LPG

PRODUCT LEVEL FOBs

Level of Prices basis 2nd Fortnight of Sep 08

18

41

66

89

HSD

Current105

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.

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.

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).

Thank you