Moily red-flags Finance Ministry proposal on fuel pricing

Red-flagging the Finance Ministry move to cut subsidies by changing fuel pricing norm, Oil Minister M Veerappa Moily on Wednesday said not compensating oil PSUs for their losses will put question mark on their survival.

The Finance Ministry wants petrol and diesel to be priced at a rate they can get in export market, rather than current practice of pricing the fuels after adding transportation and customs duty to the international price.

"From 2005-06, the oil marketing companies have not been adding any margin on crude oil or on petroleum products. What is import price plus transportation and taxes is all that is there in the selling price," he told reporters.

Mr Moily said the three OMCs, IOC, BPCL and HPCL, are together projected to end the fiscal with a revenue loss of Rs 163,000 crore in current fiscal year. Of this, the Finance Ministry wants to shave off Rs 17,000 crore by changing methodology to export parity pricing (EPP).

"If you decrease their compensation by Rs 17,000 crore, where will they get money for expansion and modernisation of refineries?" the Oil Minister asked.

Citing example of China which has been expanding refineries at a massive scale, he said oil firms need $80 billion to modernise and expand old and obsolete units.

The government compensates most of the revenue loss that the OMCs incur on selling diesel, domestic LPG and kerosene at controlled rates which are way below the cost.

"Where do we get the money if the actual losses are not compensated. They cannot expand or modernise refineries... It is a hand-to-mouth situation for oil companies, they earn in the morning and by evening spend all the money. There is no surplus generated," he said.

Mr Moily said Finance Minister P Chidambaram has been pitching for more investments to revive the sagging economy. "But if there is no money, where can the investments come from," he said.

"I can understand that in the process of consolidation of finance, reducing the fiscal deficit (is important). But is there are no expansions, no investments, this is not going to add up to fiscal consolidation. Merely deducting under recoveries is not going to improve the situation," he added.

The Oil Minister said he will shortly meet Mr Chidambaram to discuss the auto fuel pricing as the very future of oil companies was at stake.

"This is a matter of great concern because overall oil import is 84 per cent of our requirement," he said, adding, "No country can survive if these (oil) companies cannot survive."

"We need to modernise refineries for which surplus needs to be generated. Not covering under-recoveries (on fuel sales) will ultimately sink the oil companies," he added.

The Finance Ministry has informed the Oil Ministry that auto fuels need to be priced at a rate at which it can be exported. Currently, price of petrol and diesel at refinery gate is calculated by adding 2.5 per cent customs duty and freight of shipping the fuel to the international prices.

The Finance Ministry wants to eliminate freight as well as the 2.5 per cent customs duty from the pricing as the duty was adding to the under-recoveries of the state-run oil marketing companies without contributing any revenue to the exchequer.

The difference between the refinery gate price and retail selling price is under-recovery which the government compensates from Budget.

Elimination of freight and duty will lower its subsidy outgo, the Finance Ministry feels.

The Oil Ministry, however, feels that oil companies have to actually pay import duty as well as freight on crude oil, the raw material for making petrol and diesel, and denying the same would play havoc with their finances.

Mr Moily said the current pricing methodology was suggested by expert panels headed by C Rangarajan and Vijay Kelkar and the new pricing model proposed by the Finance Ministry was one based on the recommendation of BK Chaturvedi committee which had been rejected by the government previously.

The Finance Ministry felt that the current pricing was protectionist and promoted inefficiencies in the system.

To the Finance Ministry's argument that refineries in north-east performed better than units at locations such as Panipat, the Oil Ministry said refineries in north-east enjoyed excise duty exemption that made them more profitable.

Sources said like any other product, traditionally domestic refiners enjoyed 5 per cent duty protection by way of higher customs or import duty on petroleum products (finished product) than on crude oil (raw material).

So, if crude oil attracted 5 per cent import duty, finished product was charged a customs duty of 10 per cent. A few years back, the duty on finished products was brought down to 7.5 per cent and crude oil to 2.5 per cent.

In fact, the duty on crude oil was brought to zero and that on products to 2.5 per cent a few years ago, effectively reducing the protection refiners enjoyed from flooding of domestic market with cheaper imported fuel.

Now, if the import duty on fuel is brought down to zero, the refineries will have no protection. The 2.5 per cent import duty results in an increase of Rs 1.13 per litre on the ex-refinery price of diesel. This translates into an under-recovery of Rs 18,000 crore.

On petrol, the customs duty impact is about one rupee but it is passed on to the consumers and there is no impact on government's subsidy bill.