The Indian Oil Corporation (IOC) has already signed a 10-year agreement with RPL to market its products even after 2002 when APM (administered pricing mechanism) will have been completely dismantled.

The ministry of petroleum and natural gas had indicated that IOC would market 50 per cent of RPL's products while the balance would be shared equally between HPCL and BPCL. The objective of this arrangement was to ensure that there would be some sort of parity between the three navratnas largely to ensure that their marketing strengths remained intact. IBP, the stand-alone oil marketing company will team up with IOC in the marketing effort.

It has been decided at a recent meeting that the implications of the entire exercise will be neutral for both the oil pool and the companiesconcerned (which means that there will be no losses accruing to either). The central sales tax of 4 per cent is sought to be reimbursed by the pool which, in turn, could recover this from customers in Gujarat. This translates into roughly Rs 350 crore annually.

The petroleum ministry had notified the oil companies that the capacity of the RPL refinery had been assessed at 4,50,000 barrels per day (equivalent to 21.3 million tonnes per annum). Subject to the entitlement to the three oil companies for product distribution, inter-company adjustments "may be a matter of the individual company concerned".

IOC, BPCL and HPCL would lift the controlled products during the APM period to the extent required in the domestic market. Export of surplus products, if any, would have to be made without any financial liability to the pool account and as per the stipulations of the Oil Coordination Committee.

Refineries are at present not recompensed terminalling charges on facilities owned by them. The ministry hadstated that in respect of terminalling charges, a uniform objective policy in this regard, as may be evolved, will apply to all existing and new refineries including PSU/JV refineries and RPL.

As for inventory and stock-loss charges, the practice and formula of the OCC, as announced from time to time, will apply to all refineries in the country. Specifically, the ministry has stated that the proposed pact must ensure neutrality of the pool account and no extra liability to the Government.

It is in this connection that experts have calculated that the financial burden on the oil pool will be around Rs 850 crore annually if terminalling and inventory holding charges/stock losses are compensated to RPL and Essar Oil. This figure is based on data furnished of the product availability from these refineries which have a combined capacity of 32 million tonnes.

The Centre believes that this will also invite similar requests for compensation from existing refineries thereby entailing a substantial burden on thepool account.

Back-of-the-envelope calculations show that the financial implications of the proposal to pay terminal charges alone would be in the range of Rs 1,000 crore annually. Overall, there would be an enormous load of Rs 1,800 crore a year on the pool account, a burden which will be borne by customers in the form of price they pay for petroleum products.

The Cabinet had approved payment of import parity prices for refineries. Sources say that any payment towards terminalling and inventory holding charges would be over and above this level and would, therefore, require Cabinet okay.

The products from the two refineries need to be moved from Jamnagar to Kandla which would again translate into an additional burden on the pool account. This is because these costs are not being incurred at present since the imports are handled at Kandla itself. The pool, sources say, will suffer from an additional burden arising due to the sales tax under-recoveries on quantities moved outside the state compared tozero sales tax on imports at present.

RPL and Essar Oil are likely to secure a deferment of sales tax for 15 years. The current thinking in Government circles is that the two companies may be persuaded to adjust the sales tax under-recoveries from the benefit accruing to them on account of tax deferment. In case the transportation cost and sales tax under-recoveries are compensated to RPL and Essar Oil, the financial burden on the pool account is estimated to be provisionally around Rs 1,000 crore annually.

The Cabinet had, nearly two years ago, decided that prices must be adjusted in such a manner that the pool account does not run into a deficit after allowing for normal payments to the oil companies and of interest and principal to the government as regards the oil bonds issued to the PSUs. Hence, approval of the Cabinet would be needed in case the under-recoveries are to be absorbed by the pool account.

The Government is believed to have reiterated that as per the notification issued on dismantlingAPM (administered pricing mechanism), refineries are to be paid only the import parity price. It is amply clear, sources say, that no further payment need be made for whatever has been accounted for in import parity price.

Insight

Move to aid oil PSUs

There is no doubt that Reliance Petroleum's management will be relieved as HPCL and BPCL will agree to market 50 per cent of its products, while the other 50 per cent will be marketed by IOC. This decision has to be viewed in line with the recent decision by OCC that all stand-alone refiners will have to bear the export losses on their own and not by the oil-pool account. With a surplus in the domestic market, refining companies will have to export their product. But as Reliance has already entered into an agreement with the three PSUs to market its entire production of controlled products, it will be sheltered from the OCC decision.

Shishir Asthana