New oil pricing formula may be approved

[Lahore_Real_Estate]

ISLAMABAD (July 01 2010): The Economic Co-ordination Committee (ECC) of the Cabinet, scheduled to meet on Thursday, may approve the new oil pricing formula, allowing the oil refineries to continue charging 7.5 percent deemed duty on high speed diesel (HSD), which the Judicial Commission had recommended to be abolished, Business Recorder has learnt. Oil refineries have generated Rs 80 billion on account of deemed duty from 2002 to December 2009.

"Petroleum Ministry has again recommended continuing the existing 7.5 percent deemed duty on HSD," sources said, adding that oil refineries had not used the money to set up upgradation plants to improve standards of petroleum products. According to sources, the Petroleum Ministry has proposed to the ECC that determination/notification of ex-refinery prices of high speed diesel (HSD) and kerosene (SKO), produced by local refineries (should) be continued, to be managed by Ogra as per existing formula with 7.5 percent customs/deemed duty on HSD excluding 1.008 percent incidentals on HSD and SKO.

The element of customs/deemed duty will be reviewed, keeping in view the profitability of the refineries, as and when required. The ECC has also been requested to allow the Oil and Gas Regulatory Authority (Ogra) to monitor the profitability of the oil refineries, after Planning Commission raised serious concerns. Ogra will monitor refineries' profitability and submit its recommendation to government for policy decision in this regard.

"Ogra may take some steps for necessary amendments in the Act to monitor the controlled de-regulation of Inland Freight Equalisation Margin (IFEM) to avoid undue advantage or misuse of proposed de-regulation," Planning Commission said in its comments adding that CCP may also be alerted to curb cartelisation of oil industry.

The Ministry of Petroleum has also proposed that Ogra would notify per litre freight rate on monthly basis to establish standard norms/mechanism and estimated transportation cost of inland freight for a transitional period of six months. Ogra will develop necessary guidelines and framework in this regard.

The pipeline component of IFEM for movement of HSD only will remain in the common primary freight pool because of government of Pakistan volume and tariff guarantee for While Oil Pipeline (WOP) from Port Qasim to Muzaffargarh. Ogra will continue to manage and notify the primary transportation cost/IFEM for HSD up to the pipeline point on monthly basis.

In order to ensure most economical movement of petroleum products and provide level playing field to OMCs, Petroleum Ministry has proposed that Ogra will intervene if any violation takes place from refineries in allocation of petroleum products to OMCs.

After expiry of six months, Ogra will monitor freight rates of petroleum products, movement to curb cartelisation and overcharging in freight rates. All OMCs will submit detailed information on transportation cost to Ogra on monthly basis.

Petroleum Ministry has also proposed to allow the refineries and OMCs to fix and announce on monthly basis the ex-refinery and ex-depot sale prices for motor spirit (MS), HOBC, LDO and aviation fuels (JP-1, JP-4 and JP-8) at their own competitive basis.

The ex-refinery price of petroleum products has been proposed to be not more than the average actual import prices of the previous month, excluding incidentals. For imported petroleum products, only actual incidentals incurred, if any, may be included in price fixation. In case of non-availability of import prices, the refineries will fix the price as per existing IPP formula parameters, excluding incidentals.

The OMCs and dealers' margin on HSD already fixed in absolute terms at Rs 1.35 per litre and Rs 1.50 per litre respectively, will continue as per existing practice. The margins for other petroleum products are proposed to be fixed in absolute terms (Rs/litre) assuming crude price at $62.50 per barrel.

According to recommendations of Judicial Commission regarding Parco's special status, especially in respect of determining Parco ex-refinery price on uniform basis stands eliminated with deregulation of MS, HOBC, LDO and aviation fuels pricing. Parco will be advised to create special reserve for future upgradation, modernisation, etc, as in case of other refineries. Recommendations of Judicial Commission regarding fixed GST ie Rs/litre, being taxation/revenue, would be considered by Finance and Federal Board of Revenue (FBR) who may take appropriate action in this regard.