Private oil companies may not sell fuel to PSUs if pricing model changes

Private oil refiners such as Essar Oil and Reliance Industries may not sell any fuel to state-owned oil firms if the government changes the way petrol and diesel are priced.

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.

The difference between the Export Parity Price (EPP) being propagated by the finance ministry and the currently in vogue Trade Parity Price is about $3-4 per barrels.

Industry sources said private refiners feel that if they are to get export parity price, then they might as well set up an export-oriented unit (EOU) or a SEZ refinery, sell the fuel in overseas market and avail of tax benefits like 7-year holiday on payment of income tax and duty free imports and exemption from payment of excise duty.

The refiners, they said, have in no uncertain terms told the public sector fuel retailers that they will not sell auto and cooking fuel at EPP.

Essar and Reliance supply one-fifth of diesel that Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum sell through their petrol pumps.

In the absence of supplies from the Gujarat refineries of the two firms, the PSU oil firms, who are short in diesel and LPG production capacity, will be left with only alternative to import the fuel to meet domestic demand. Importing fuel will be a losing proposition as they will not be compensated for the cost of transportation as well as import or customs duty paid on such imports.

In such a scenario, the oil firms are unlikely to import, a scenario that will lead to domestic scarcity, they said.

Oil Minister M Veerappa Moily has already raised concerns about the Finance Ministry's move that he says will put question marks on survival of oil PSUs.

"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 had said on March 6.

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 the current fiscal.

Of this, the Finance Ministry wants to shave off Rs 18,000 crore by changing methodology to EPP so that its subsidy outgo is reduced.  

The government compensates most of the revenue that the OMCs lose 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," Mr Moily had said.

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.

Sources said 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.