But export parity pricing will reduce the margins of the refiners.
The BK Chaturvedi committee, which has recommended pricing of petrol and diesel at market rates, says the implementation of its suggestions will mean that the government will have to issue 36 per cent lesser oil bonds this year than projected even as the crude oil price has risen over 50 per cent in the current financial year.
| KEY RECOMMENDATIONS OF THE CHATURVEDI COMMITTEE PETROL
DIESEL |
- Increase prices by 75 paise every month to align with global prices by March 2010
- Prices should be higher by Rs 2 per litre for private cars in metros
LPG
- Households should get six subsidised cylinders per year. This should be reduced to four, two and zero in the subsequent three years
TAXES
- Customs duty on petrol and diesel should be made zero from the current 2.5 per cent
- Special tax on oil and gas production from pre-Nelp blocks. ONGC and OIL should pay the entire incremental revenue if oil prices rise above $75 per barrel, while private companies should pay 40% of incremental revenue
REFINERIES
- Refineries should sell petroleum products to the marketers at export parity prices rather than trade parity prices. Applicable for all refineries except those in the north-east.
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The committee has recommended removal of subsidies on petrol, diesel and domestic LPG in a phased manner. At the last fortnight crude price level of around $120, prices of diesel and petrol will have to go up by Rs 23.2 and Rs 11.6 per litre, respectively.
If the recommendations are implemented, the government will have to issue Rs 60,000 crore worth of oil bonds in the current fiscal as against the estimate of Rs 94,600 crore that was arrived at when the government last revised the retail prices of petroleum products and reduced the taxes levied on them.
This year’s average crude oil prices ($121.98 per barrel) have been 53 per cent higher than the 2007-08’s average of $79.25 per barrel.
The committee says if the prices are allowed to be determined by the market, the government will not have to issue any oil bond in the next financial year, starting April 2009, even though the government will be subsidising diesel till March 2010 and domestic LPG till 2011.
The committee, appointed by the prime minister to look into the financial position of the oil companies, has said that the burden of “under-recoveries”, or the difference between the desired selling price and the actual selling price of petroleum products will fall by around 11 per cent if export parity, rather than import parity, is the basis for the pricing.
The committee says the implementation of its recommendations will bring down the under-realisation to Rs 1,90,958 crore for the current financial year from the estimated Rs 2,11,400 crore. This is at the average June price of $129.72 per barrel.
The report says that petrol prices should reflect international prices by March 2009 and diesel prices by March 2010. This will bring down the financial burden of the oil marketing companies by Rs 67,746 crore, says the report.
The committee, headed by Planning Commission member and former Cabinet and petroleum secretary BK Chaturvedi, has also recommended a tax on the “super profits” of both public sector and private sector oil companies which are producing oil and gas from blocks offered before the New Exploration Licensing Policy (Nelp) was implemented in 1999.
“This will comprise Rs 55,627 crore from ONGC and Oil India and Rs 4,264 crore from other crude oil producers,” the committee said in its report, which was submitted to the government earlier this month. Reliance Industries, Cairn India and British Gas are some of the private sector companies that produce oil and gas from pre-Nelp blocks.
This means if the recommendation is approved, the financial burden of ONGC and Oil India for the year will increase 23 per cent from the earlier Rs 45,000 crore. The burden on GAIL is recommended at Rs 500 crore for the current year
ONGC, Oil India and GAIL already give discounts to oil marketing companies on the crude oil and LPG they sell. The petroleum ministry had said in June 2008 that the three companies would give discounts worth Rs 45,000 crore this year.
The oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — will not bear any burden of the under-recovery, but “are simply expected to carry on their commercial operations under competitive price and cost conditions,” the committee says.
The recommendations of the committee will, however, reduce the margins of the country’s crude oil refineries as they will have to sell products to the oil marketers at export parity rather than trade parity prices.
At export parity the refinery margins will reduce by around $3 per barrel. In case of trade parity pricing, the refineries add elements such as freight, Customs duty and insurance to prices of petroleum products, which help Indian refiners record margins that are almost double that of refineries in Singapore, the regional benchmark.