Refiners, ministry wary of duty rationalisation

Move to rationalise import duty could hit margins.

With the possibility of rationalisation of import duties on crude oil and automobile fuels at 5 per cent, refinery companies and the petroleum ministry are wary that refinery margins will be adversely affected. Moreover, the move will discourage companies from setting up new refineries, refiners have said.

The Energy Co-ordination Committee, chaired by Prime Minister Manmohan Singh, at a recent meeting called for equalisation of import duty on crude oil and petroleum products. The proposal has been sent to the finance ministry.

The duty on crude oil is 5 per cent while transportation fuels attract a 7.5 per cent duty. This differential duty structure provides oil refineries around 20 per cent effective protection, which is helping state-owned refineries maintain margins of $3-4 a barrel.

Rationalising import duties on crude oil and products would bring refinery margins down to below $2 a barrel, said an analyst. "And if duty on automobile fuels is brought to 5 per cent, duty on liquefied petroleum gas and naphtha, too, should be brought to 5 per cent from the present zero per cent," he said.

The private sector refiners were likely to fight duty equalisation, the analyst said.

Reliance Industries' 33-million-tonne-per-annum refinery at Jamnagar recorded a refinery margin of $11 a barrel for the quarter ended December 2006. The company has been calling for subsidies on retail sale of petroleum products similar to those offered to state-owned oil marketing companies.

"Wiping out the differential duty on crude oil and petroleum products will delay our return on investments in refinery operations. Import duty on crude oil needs to be necessarily lower than petroleum products so that there are some profits that refineries can squeeze out," said an executive at Indian Oil Corporation, which operates seven refineries.

The official, however, agreed that cutting import duty on petroleum products from the current 7.5 per cent would help reduce the under-recovery burden of the oil marketing companies.

For the financial year 2006-07, under recovery claims are pegged at Rs 49,000 crore (Rs 22,000 crore on account of diesel and petrol, and Rs 27,000 crore on liquefied petroleum gas and kerosene).

The finance ministry has allocated oil bonds worth Rs 28,000 crore to compensate the companies for their retail losses. Discounts on petroleum products from refineries and subsidy sharing by state-owned upstream companies are helping the oil marketing companies keep their heads above water.

"The government is attempting to protect its bleeding oil marketing companies by bringing in money from the profit-making refineries," said an official in the petroleum ministry. "But investments in refineries are huge and they too need some protection." he added.