Oil subsidy, pricing and profits
And if those voted in power decide to catch the bull by the horn, how would they tackle such a sensitive pricing issue while the consumers are already suffering from soaring food prices? Perhaps, they can opt for a fresh approach to cut fiscal deficit that may make a difference.
The new government has to look at the whole issue in its entirety rather than exercising easy options to pass on the burden of oil subsidy to the consumer or accumulate debts to pay oil marketing companies. Raising prices would be the simplest thing to do. The estimated Rs160 billion liability on account of subsidy needs to be shed by applying prudent economic principles rather than going for commercial bank borrowing —paying Rs54 billion for Rs38 billion in three years.
If the new civilian government has to keep its pledge to the voters to stabilise prices, it has to look into the oil pricing mechanism since 2001. A Rs10-15 per litre increase in diesel and kerosene prices may be necessary on the basis of existing pricing formula to bridge the differential between international susidised domestic prices but it could be significantly offset by correcting the existing mechanism. This could be done by removing an unfair deemed duty on petroleum products particularly, on diesel being allowed to refineries and rationalising freight equalisation margin for maintaining a uniform price across the country’s 29 depots.
Politically, it would be prudent for the new government to present the entire oil pricing picture before the nation honestly. This should include: who is earning what, who has siphoned off public money and deprived the people and the economy of billions of rupees, say for example in eight years or so. This would require the new government to at least make public a report compiled by the National Accountability Bureau (NAB). A fresh enquiry may not be advisable given the domestic culture - and put under the carpet by the previous government. The report had pointed out over Rs50 billion worth of annual anomalous profits to the oil industry due to faulty decision making of the former economic managers.
While the public pressure led to some subsequent amendments in the system, the refineries continue to earn windfalls of guaranteed rates of return and erroneously continuing deemed duties even on domestic production of oil. The caretaker minister for petroleum, Ahsanullah Khan had tried to take an initiative to revise the oil pricing mechanism but those more powerful than the minister effectively blocked the move. Many in the oil ministry suggest that the petroleum ministry had made more than two attempts in consultation with the refining industry to rationalise their duties but those in the ministry of finance and close aides of the President had pre-empted such measures. One of them has now joined a leading refinery himself.
It may be surprising for many how 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. Equally important would be to see why a directive issued by former prime minister to 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,” could not be implemented for more than two years now.
This pricing anomaly had caused more than Rs200 billion losses to consumers in seven years and the refineries were making windfalls compared to 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.
An examination of the profitability of four refineries reveals an unusual level of profitability in Pakistan although none of them had honoured their commitment to improve their quality to European standards or add to their storage capacity. The National Refinery Limited increased its profit from Rs23 million in 2001 to Rs704 million that reached Rs1.2 billion in 2004, followed by Rs2.458 billion in 2005, Rs3.7 billion in 2006 and Rs4.3 billion in 2007. As such, profitability increased by more than 180 times in just six years.
Likewise, Pakistan Refinery’s profit increased from Rs76 million in 2000-01 to Rs610 million in 2002, further to Rs824 million in 2003, Rs1.4 billion in 2005, further to Rs2.1 billion in 2006 and Rs2.45 billion in 2007. As such, its total profitability increased by 31 times in six years.
The profitability of Attock Refinery that stood at Rs29 million in 2000-01, increased to Rs727 million in 2001-02. Its profit touched Rs1.28 billion in 2004-05 and reached Rs1.7 billion in 2006-07. As such, the profitability of ARL increased by 58 times in six years.
Similarly, the profit of Pak-Arab Refinery Limited stood at Rs1.3 billion in 2000-01, which increased to Rs2.36 billion in 2001-02. The profit of Parco further went up to Rs8.9 billion in 2004-05, followed by Rs9.6 billion and Rs10.6 billion in 2007. This meant that Parco’s profit increased by 726 per cent in six per cent.
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 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. They says deemed duties on direct imports by the OMCs should be applicable to the OMCs.
Recently, the senior officials in the oil ministry had proposed that the pricing mechanism needed to be rationalised to remove anomalies once and for all. They also recommended recovery of the deemed duty that the refineries had been recovering beyond the approved one-year period and the money so realised could used 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. It would, therefore, be logical for the new government to put the house in order before it moves on to fresh initiatives of public welfare, given the pressure of high international oil prices and the protection to the country’s largest Parco refinery, scheduled to end later this year.
In the heat of public cry on oil prices, the government had ordered a special audit of the issue in March 2005 — a job not fulfilled even after three years. It would, therefore, be helpful in public interest for the government to make public these reports, and reveal all facts and figures about what went wrong where, and what are best options to overcome the crisis without affecting the peoples’ welfare and development.