Iocl Ppt Stage 2

Analysis of OMC Transactions at Presented by: Namita Gupta FMG XVII B 81091 FORE School of Management

Concept of sale & purchase BPCL &amongst HPCL does notOMCs have their refineries in northern region still they have their retail outlets that too conveniently located. How do they get supplies?

There is an agreement among the three major PSUs-IOCL, BPCL, and HPCL to provide the petroleum products to each other. Determination of Quantity ü For the purpose of billing the quantity supplied of the product is measured at 150 C. ü For the products like MS, HSD, SKO the quantity is determined in KL and for LPG it is determined in MT. Determination of Price ü The products are transferred at RTP, determined every fortnightly at headquarters of respective OMCs.

A comparison is being made between the different products to determine which are more profitable when they are being sold through the OMC route or through the retail outlets.

For the purpose of operation, Indian Oil Corporation has divided whole of India into 8 locations.

Product wise analysis The major products involved in the OMC transactions are: 

Aviation Turbine Fuel (ATF).



BS-III HSD (High Speed Diesel)



Euro-III MS (Motor Spirit) commonly known as petrol



Superior Kerosene Oil (SKO) for Public Distribution System(PDS).

Aviation Turbine Fuel

Calculation of Cost

BS III HSD

EURO III MS

Superior Kerosene Oil

Retail vs. OMC Fig. in Rs./KL

Interpretations  When

crude oil price is between $35 per barrel to $55 per barrel, it is profitable for OMCs to sell most of their products through retail outlets.  Even though IOC is incurring loss on sale of SKO through retail outlet it cannot stop its sale.  Other products are more profitable when sold through retail outlets, but the sale has to be made to other OMCs as per their requirements.

Retail Pricing

Multiple Objectives of Pricing System Providing resources for the government

Minimising impact on consumers

Providing adequate incentive to oil companies

Promoting efficient consumption choices

Petroleum Pricing History

Administered Price Mechanism

o Oil companies were told how much to sell and at what price. o APM ensured stability of prices insulating domestic market from the volatility of prices in international markets o A fixed level of profitability for the oil companies was ensured subject to their achieving the specified capacity utilisation . o The pipelines were compensated for operating costs and return @ 12% post tax net worth. o The S.P. of a product was arrived at by adding the applicable freight from the oil refinery to the Depot and then to the Retail Outlets /direct consumers. Dealers commission was also added(wherever applicable ). o The prices for certain petroleum products like kerosene, LPG (domestic) were subsidized for socio economic reasons. o Fuels like petrol, ATF, LPG for (industrial use) were priced above the cost of production to discourage their inessential use.

Dismantling of APM proposed… 

Pricing of MS & HSD to be de-controlled (April 2002)



There was fortnightly revision of the MS & HSD prices by the OMCs in consultation with the GoI



Subsidy on PDS Kerosene and Domestic LPG to be reduced

Price Determination Post APM  

The prices for kerosene & LPG are determined on the basis of import parity prices For petrol & diesel, it is determined on the basis of trade parity pricing model. Import parity prices= International price + Insurance +freight cost +customs duty. Trade parity price= weighted average of import parity and export parity prices in the ratio of 80:20

Published Policy

Market Determined Pricing for MS & HSD (No Intervention in Pricing) n

Compensation only for LPG & SKO n

Transparent Under recovery Compensation Package n

Ground Realities Controlling the Prices (Full Control on Pricing) n

Compensating PSUs for all Products n

Non Transparent Selective Compensation Package n

Manipulation of market price and non transparent way of compensating select players for underrecovery were never a part of published policy.

Inadequate Price Increases…

300% 280% 260% 240%

%

220% 200% 180% 160% 140% 120% 100% 2004 Brent Crude Diesel

2005

2006 2007 Year Indian Crude basket Petrol Kerosene LPG

Inadequate and ad-hoc price revisions

2008

Impact on Oil Companies  OMCs

incurring losses of Rs.60 crore/day on sale

of petrol, diesel, Kerosene & LPG*(as on 22nd April). • Per unit under-recovery* Diesel - Rs.0.5/litre (over recovery) Petrol – Rs1.40 /litre PDS Kerosene – Rs 9/ litre LPG cylinder - Rs 117/ cylinder  Increasing  Crowding

exposure to debt for the oil companies

out private sector participation

Source: Business Standard, 22 April 2009

Under Recovery of Sensitive Petroleum Product

Fig. in Rs. crore

Impact of Lopsided Pricing  Increased

market distortions  At high crude oil prices, subsidized diesel cheaper than Fuel Oil prices • Industries and power plants shifting from FO

to diesel • Increased demand for diesel increasing imports for diesel increased pressure on OMCs

Sub optimal utilization of petroleum products

An indicator of Govt. Policy vis-à-vis other developing Countries Most Recent Retail Price Ratio Country

Gasoline /Diesel Gasoline/Kerosene

Diesel/Kerosene

Argentina Bangladesh Chile China Ghana Guatemala

1.3 1.4 1.4 1.0 1.1 1.3

1.3 1.4 1.4 1.3 1.2

1.0 1.0 1.0 1.2 0.9

India

1.4

4.9

3.5

Indonesia Kenya Malawi Morocco Nigeria Pakistan* Philipines Sri Lanka Thailand Tunisia Uganda Vietnam Zambia * Notified ex-depot prices.

1.0 1.2 1.0 1.4 0.9 1.5 1.1 1.5 1.0 1.5 1.1 1.4 1.0

1.5 1.3 1.4 1.3 1.6 1.0 2.3 1.0 2.1 1.2 1.4 1.3

1.3 1.2 1.0 1.5 1.1 0.9 1.5 1.0 1.4 1.1 1.0 1.3

Source: WorldBank/ ESMAP Report

Since Product Prices are broadly comparable net of taxes, large deviations of calculated ratio from unity reflect Taxation and Subsidy policy of respective Govt.

n In no other country, prices are as distorted as in India n Heavily Subsidized fuel lead to criminal activities through illegal diversion n Developing countries are adopting other means to provide relief to Lower Income

MS – HSD pricing  High

incidence of taxation in the MS and HSD

pricing • 49% in the petrol retail price • 27% in the diesel retail price

Sources: PPAC

Kerosene and LPG 

Kerosene • Subsidized kerosene siphoned off to adulterate

diesel • Less than 2% of rural households use kerosene for

cooking • 55% rural households use for lighting but is an

inefficient source of lighting  LPG • 76% subsidy goes to urban areas • 40% of subsidy enjoyed by top 6.75% total

population

Source: TERI Publication ‘Petroleum pricing in India: Balancing equity and

Subsidy Delivery leads to temptation

Oil Bonds and Upstream Assistance for PSUs Fig. in Rs. crore

Since no subsidy is given to private sector, Private Oil Companies are left with an Under Recovery of Rs 6/L on MS and Rs 9/L on HSD A non level playing field has been created between Public and Private sector

Managing Volatility

Flexible taxing to manage volatility

Ad Valorem to Excise Duty Specific Duties

Suggestion: The replacement of ad-valorem portion of the excise duty to specific duty on un-branded products as well is expected to act as a cushion against the cascading effect of any future change in international prices on domestic prices for consumers.

SALES TAX RATES ON MAJOR PETROLEUM PRODUCTS AS ON 01.06.2009

Uniform Sales Tax / VAT in States is FAIR TO PUBLIC Reduction in Rates will share central burden with states.

Combination of Duty and Tax Rationalization can reduce unrecovered Under Recoveries

Recommendations .. n Let us have a simple, transparent system of pricing which is based on following postulates • Induce consumers to use petroleum products efficiently and cleanly • Subsidize a consumer, rather than the product. Target subsidies only to the deserving beneficiary segments • Specify specific duties or levies that are transparent and simple, not ad-volarem • Target for One India – One Market – One rate of tax – for petroleum products and look for other sources of revenue generation n Let market forces determine prices • Appoint Regulator soonest to ensure fair play, competition and optimal utilization of Industry Infrastructure

Contd… n Let us have no discrimination between different companies on ownership or any other criteria. • Treat PSUs and Private players on par for oil subsidy to create a level playing field. n Let us learn from other developing Countries • Study in greater depth steps being taken by countries like Ghana, China, Thailand, Malaysia, Indonesia, Philippines etc. and pick-up successful interventions.

Thank You!!!