Top oil panel suggests price hikes

Written by Anupama Airy | New Delhi, Aug 10 | Updated: Aug 11 2008, 08:18am hrs
The high-powered committee on financial position of oil companies, constituted by the Prime Minister, has proposed an immediate hike in petrol prices by Rs 2.50 a litre every month till March 2009 and diesel prices by 75 paise a litre for 24 months. If implemented, petrol and diesel sales in India will no longer have to be supported by upstream discounts or through issue of oil bonds.

The committee headed by Planning Commission member B K Chaturvedi has asked the government to completely disengage itself from the process of pricing of petroleum products and allow the state-owned oil marketing companies ---IOC along with IBP, BPCL and HPCLto make gradual fuel price adjustments in line with the competitive market structure.

Proposing a scheme for gradual replacement of the system of providing subsidised LPG and PDS kerosene, the committee has asked the government to restrict the entitlement of subsidised LPG cylinders to six refills a year. In the subsequent year, this should be further reduced to four refills and in the next two years to two and nil, respectively. The average number of refills per household currently stands at 7.43. Households be eventually encouraged to subscribe to piped city gas networks, wherever available, said the report.

The committee has also recommended levying a Metro Extra tax of Rs 2 per litre on diesel in large cities where subsidised diesel is being used in a major way by private cars and sports utility vehicles. This tax, it said, should be implemented in phases through four 50 paise a month impost.

A move that will make goods transport and rail travel dearer for the consumers, the committee has asked OMCs to negotiate full market prices with large industrial consumers of diesel like the Railways and the state road transport corporations. These two segments alone account for 10% of diesel consumption in the country. A more rapid calendar of price adjustment than for general transport consumers of diesel be negotiated with the Railways and other bulk consumers, the report said.

On the duty front, the committee has proposed that the import duty on petrol and diesel should be reduced to zero as has been done in the case of crude oil, domestic kerosene and LPG. It has been recommended that the excise duty on petrol be temporarily reduced to allow faster adaptation of the petrol price to reflect international price and then be restored by March 2009. While no other changes in duties have been recommended, the committee has proposed that all central duties and taxes be levied to arrive at the retail selling price before state taxes and duties.

The committee has also proposed levying a Special Oil Tax on the domestic producers of crude oil from the pre-NELP blocks. The SOT, which will kick in at $75 a barrel, will either be annulled once price adjustments in prices of automotive fuels are over or will be reset downwards to equal the fuel subsidies on LPG and Kerosene for the BPL families. In the case of private producers like Reliance Industries and Cairn India, which have entirely funded their E&P programmes, a rebate of 60% is proposed to be extended. As a result, their effective rate will be 40% of the revenue in excess of $75 a barrel while for public sector oil producersONGC and OIL, it will be 100% after the $75 a barrel level.

Interestingly, no special taxation in the form of a SOT has been proposed for oil refining and marketing companies. This will largely benefit private refiners like Reliance Industries and Essar Oil. The Metro Extra has been initially proposed for 11 large notified cities to begin with. These are the National Capital Territory, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad, Kanpur, Pune, Surat and Agra. Subsequently, other major cities like Chandigarh, Lucknow, Bhopal, Jaipur etc, should also brought under the ambit of this tax, the committee said.

The committee has recommended that subsidies on domestic LPG and PDS kerosene be strictly restricted to below the poverty line families only. Moreover, these subsidies should be delivered through smart cards or cash transfer scheme, as against the existing supply of products much below their market prices (which encourages large scale diversions).

All the price adjustments recommended by the committee have been made on the basis of prevailing prices in the third and fourth weeks of July 2008 for crude oil of about $130 a barrel and associated prices of refined petroleum products. If the prices rise even further, additional adjustments will need to be made. On the other hand, if prices of crude fall in the global markets, some of the proposed price increases may have to be done away with. In case the fall in prices is over a sustained period of six months, there will be no further increase (of 75 paise per month) in the diesel prices and rather a reduction in petrol prices would be considered.

At the prevailing global crude oil prices, under-recoveries of OMCs are estimated at Rs 1,90,958 crore. With the implementation of price adjustments and other path-breaking recommendations of the committee, the financial shortfall to be borne by the government through oil bonds in the first 12-month period will be Rs 60,122 crore. If the price of crude oil does not rise further and all recommendations are accepted, there will be no need to issue any further oil bonds in the subsequent 12 months.

India being a net exporter of refined petroleum products, the committee has recommended that the refinery gate price of petrol, diesel, PDS kerosene and domestic LPG be based on the free on board export prices instead of the present trade parity concept. The price will be determined on the monthly average of price quotes on Singapore, Arab Gulf, North West Europe and US eastern seaboard deliveries.

Adjustments on account of quality in the internationally quoted fuel would be factored in by the refineries to arrive at the benchmark refinery gate price for fuels with Bharat Stage-II standards. By changing the pricing basis to export FOB prices, the refineries have been placed on a more challenging basis, where the protection that has been accorded to them by way of ocean freight and import duty has been taken away.

It is appropriate in our view that the Indian refining industry, which has world-sized companies, be placed on a par with the international refining business, the report said.