ISLAMABAD, Feb 10: The caretaker government is re-examining the entire oil pricing mechanism in view of the undue profits going to oil refineries on account of deemed duties and guaranteed rates of return.

Informed sources told Dawn that Petroleum Minister Ahsanullah Khan, a man from the oil industry, had been surprised to know that the refineries continued to benefit from the 10 per cent deemed duty allowed for one year about six years ago to modernise their system to European standards. And more so, the refineries have not been able to increase their storage and improve their products to Euro-IV standards as they had promised to do in return.He was reportedly shocked to learn that former prime minister Shaukat Aziz had ordered the petroleum ministry in February 2006 “to formulate recommendations for the phased withdrawal of the deemed duty for all four products (HSD, SKO, LDO and JP4) in the interest of rationalising the price regime across all the existing refineries,” but, official documents suggest that the order somehow went missing from the official record, and remained unimplemented even today.

The minister took the matter with the president and the caretaker prime minister to undo ‘the anomaly’ that had caused more than Rs200 billion losses to consumers in seven years, the sources said, adding that the refineries elsewhere were way behind their Pakistani counterparts in terms of earning per share and profits. For example, refineries in Singapore today earn between $2 and $3 per barrel, while refineries in Pakistan earned between $8 and $11 per barrel. As a result, the earning per share of Pakistani refineries has increased on an average of Rs11 per share compared with Rs3-4 about three years back.

The oil marketing companies (OMCs) have also been agitating with the government that they have been unnecessarily been subjected to price differential claim even on products that they were not importing. Therefore, they have been demanding that the impact of price differential on crude oil should be payable by refineries who were earning deemed duty on domestic production, although the duty is technically applicable only on imports while the impact of direct imports by the OMCs should be applicable on the OMCs.

The sources said that some senior officials in the oil ministry had also proposed to rationalise the pricing mechanism and remove all anomalies once and for all, and also to recover the deemed duty that the refineries had been recovering beyond the approved one-year period and use that amount for subsidising the consumers or meeting the rising fiscal deficit. However, they were advised by the high-ups not to open the Pandora ’s Box during the interim period and look for improvements instead.

The sources said the time was ripe for a price review given the record high international oil prices and the protection to the country’s largest Parco refinery scheduled to end later this year.

Mainly because of these protections, the profitability of four refineries that ranged between Rs23 million and Rs1.3 billion depending on their capacity in 2000-01 increased to between Rs1.7 billion and Rs11 billion last year, showing a total increase of about 2,000 per cent.

The sources said the petroleum ministry had been given a green signal by the caretaker government to complete the rationalisation exercise before elections so that increase in oil prices and reduction or removal in deemed duties were done simultaneously to limit the shock to people and economy to a bare minimum to create a balance in oil pricing.