Modified oil pricing: too little too late
The official patronage to a few players of the oil supply chain has broadly remained unchanged at the cost of the majority of the population. The entire arrangement contradicts the policy of liberalisation, deregulation and privatisation.
People dealing with the prices of petroleum products suggest that even after some corrections in the pricing mechanism, the oil industry takes an unjustified amount of about Rs110 billion per annum through high speed diesel (whose prices are outside the domain of the Oil and Gas Regulatory Authority (Ogra)) and motor spirit (that is a regulated product). Officials in the petroleum ministry defend the HSD pricing while Ogra holds a neutral view.
When the petroleum sector was deregulated about seven years ago, the refineries were allowed 10 per cent deemed duty on locally refined products as a stop-gap arrangement for one year to remain at par with imported products carrying customs duty. This was meant to enable them to upgrade themselves for competition in a deregulated free market, reduce sulphur content from environmental perspective and enhance their storage for strategic reserves.
Nothing of that sort has happened for almost eight years now. The market became deregulated only for consumers as prices were set through cartelisation and faulty pricing formula. Refineries and marketing companies remained protected much beyond one year to earn billions of rupees every year.
Except one, all refineries still produce high-sulphur product and have not increased their storage capacity. About Rs50 billion special reserve account is lying with refineries’ unutilised that should have been used for upgrading and expanding storage capacity. And there is no explanation as to why the high speed diesel having much higher environmentally hazardous content of one per cent sulphur and environment-friendly 0.5 per cent sulphur diesel is being sold at the same rate.
And when the change came about, it was too little too late. About three years ago when the media started criticising the price fixation by the Oil Companies’ Advisory Committee (OCAC) and the pricing formula for loads of errors and the National Accountability Bureau launched an investigation into the issue, the then Prime Minister Shaukat Aziz decided to empower Oil and Gas Regulatory Authority (Ogra) to fix the prices and slightly corrected the erroneous mechanism.
The Nab report, according to insiders, concluded that more than Rs200 billion went wrongfully into wrong hands in seven years and exposed many faces. The report was never made public.
In February 2006, Mr Aziz presiding over a meeting of the Economic Coordination Committee (ECC) of the cabinet, directed the ministry of petroleum and natural resources “to formulate recommendations for phased withdrawal of the deemed duty for all four products (HSD, SKO, LDO and JP-4) in the interest of rationalising the pricing regime across the existing refineries.” Nothing has changed since then and the directive remained buried in the rusting racks of petroleum ministry, although the industry had agreed to reduce the deemed duty to 7.5 per cent and then to 5.0 per cent after one year.
The petroleum ministry continues to defend this illegal “deemed duty” going to the refineries on the grounds that its withdrawal will lead to their losses and perhaps closure. Was the transition from a controlled to deregulated market planned to be prolonged for so long? Was not this a promise with the nation that refineries would compete with each other without any protection? Should the general public be made hostage to the “(un)expected closure” of refineries that seldom pass on their profit to the market?
On the hand, an examination of the profitability of four refineries suggests a totally different picture and reveals an unusual level of profitability, second perhaps only to the dotcom profits in the United States although none of the refineries honoured their commitment to improve the quality to the European standards or add to their storage capacity.
The National Refinery Limited increased its profit from Rs23 million in 2001 to Rs704 million in 2003 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, swelled to Rs2.1 billion in 2006 and Rs2.45 billion in 2007. As such, its total profitability increased 31 times in six years.
The profitability of Attock Refinery that stood at Rs29 million in 2000-01, went up 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 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. Its profit 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 years.
On top of that, a couple of lacunae still remain inbuilt in the pricing formula of HSD and motor spirit. Of the country’s total oil consumption of about 18 million tons, the share of diesel is about 8-9 million tons per annum and even a small decimal in price difference translate it into billions of rupees.
Despite the fact that only the Attock Refinery Limited produces diesel with 0.5 per cent sulphur content, the price of both kinds of diesel – with one per cent and 0.5 per cent sulphur content – is being sold across the country at the same rate and the companies producing low quality diesel enjoy the price of a good quality product.
Second, a levy of 10 per cent customs duty on diesel price is charged from the consumers without factoring in almost half of the locally produced diesel which should not carry import duty. More so, since the import of crude oil does not attract import duty, technically, local products refined from this crude should not contain import duty. Ironically, 3.5 million tons of diesel produced by local refineries and four million tons imported from abroad are sold at the uniform rate of Rs64.64 per litre.
Third, the ex-refinery price/import parity price of HSD before price differential claim (PDC), according to Ogra calculations, is Rs85.59 per litre which also includes 10 per cent customs duty or Rs9, 380 per ton. When IFEM, dealer commission, OMC margin and general sales tax is added, the final sale price comes to Rs100.26 per litre. The government pays Rs35.469 per litre as PDC to the marketing companies whereby restricting the diesel price at Rs65.60 per litre.
Pricing experts suggest that the government should not pay Rs35.469 per litre as PDC to companies because 10 per cent import duty is a government levy and could not be accounted for while determining the PDC. If the HSD price is calculated without import duty, the PDC amount payable to marketing companies comes to Rs26.50, providing a saving of Rs9 per litre. This chunk alone translates into Rs98 billion per annum at the current prices.
Fourth, the motor spirit price is calculated on the basis of a mix basket of naphtha and mogas which is an erroneous formula. Since naphtha prices are published by the Platt’s oilgram, there is no justification for old formula that should have been replaced in June 2002. If MS prices are calculated on the basis of Naphtha prices, the sale price would reduce by Rs6 per litre, providing a saving of Rs12 billion per annum at current market prices.
The minimum a government should do in the current high oil prices is to conduct an impartial audit of the refineries accounts and determine a price that is fair to all stakeholders without any protection to one segment at the cost of general consumers or the national exchequer. In both cases, it is the common man who suffers in the end.
The government should also make public the Nab report about the oil pricing that was prepared by spending hefty amounts out of the taxpayers’ money. A pricing formula that is not only fair but is believed to be just is in the interest of all stakeholders. That could only be done by independent economists and auditors, and not by few bureaucrats or vested interests.