CAG points to gaps in petroleum pricing

Says faulty methodology led to undue benefits for RIL & Essar Oil

In its audit report on public sector oil marketing companies (OMCs), the Comptroller and Auditor General of India (CAG) on Friday said the government’s methodology for pricing petroleum products had led to undue benefits to private refiners. In 2011-12, Reliance Industries and Essar Oil had benefited to the tune of Rs 667 crore on diesel alone, it estimated.

Government refineries lift petroleum products from standalone refineries to address the gap between production and domestic demand, for which they pay import-linked prices, or refinery gate prices (RGP). But private refiners exported their remaining products at a price lower than the RGP, CAG said.

It added there was no explicit and consistent government policy on sharing of underrecoveries (losses due to subsidised sales) by each shareholder, which adversely affected both upstream companies and OMCs. During FY07-12, the five-year period of the CAG study, overall underrecovery on liquefied petroleum gas and kerosene stood at Rs 2,10,676 crore, against the 2011-12 Budget provision of Rs 14,121 crore.

OMCs, the CAG report said, benefited by Rs 26,600 crore through the pricing of products at the refinery gate. However, this cost advantage wasn’t adequately translated into an improvement in refining margins, optimisation of production costs and an improvement in yields.

The audit report also noted the settlement of OMCs’ underrecovery claims was consistently delayed up to 310 days and, through 2005-09, these entities had been compensated through the issue of oil bonds, instead of cash settlement. Between 2007-08 and 2011-12, the delay led to an interest loss of Rs 5,180 crore to OMCs and affected the liquidity positions of these companies.

The share of upstream companies in funding underrecoveries rose from 33 per cent in 2007-08 to 40 per cent in 2011-12, the report said. OMCs incurred excess marketing costs on sale of regulated products over the admissible rate fixed by the government.

The auditor also found three of the six refineries audited, including Indian Oil Corporation’s Haldia refinery and the Mumbai refineries of Bharat Petroleum Corporation and Hindustan Petroleum Corporation had considerable scope of improvement, in terms of gross refinery margins.

The CAG recommended appropriate checks to prevent the likely diversion of cheaper subsidised fuel, which would dilute the positive impact of market pricing for bulk customers on underrecoveries. The share of bulk high-speed diesel (HSD) in total HSD sales had declined to about 10 per cent in August 2013 from annual average of 18 per cent in 2011-12, the report said.

SLIPPERY GROUND

• Rs 667 cr: Estimated undue benefit to RIL and Essar Oil in 2011-12
• Rs 1,428 cr: Benefit to standalone PSU refineries in 2011-12
• Rs 2,10,676 cr: The underrecovery on LPG and kerosene for 2007-12, against the 2002 Budget provision of Rs 14,121 crore
• 10%: The share of bulk high-speed diesel (HSD) in total HSD sales in August 2013

OTHER OBSERVATIONS

On Mumbai airport

• 4-year delay more than doubled cost to Rs 12,380 cr in 2011, against Rs 5,826 crore estimated in 2006
• Financing risks not effectively transferred to concessionaire
• Outsourcing of cargo business and hotel operations by MIAL led to a fall in AAI's revenue share

On Railways

• Modified approach for VMPL-gauge conversion project without CCEA approval led to additional financial burden of Rs 128 crore
• 15-month delay in formation of SPV led to 100% cost overruns for HPRCL (new line project), amounting to Rs 218 crore
• Pending liability of Rs 79 crore on HMRDC-gauge conversion project; no clause for payment of sub-ordinate debt