Saturday, April 7, 2012

Deregulation,OMCs,Under-recoveries and Favours To The MNCs and Private Players By MM Singh.

          In Cost-based pricing of petroleum fuels,which is the correct method,and which was followed till the 1990s,INDIVIDUAL ones' prices, cannot be raised.But, the LIES Under-recoveries, are a trick to raise the prices of individual fuels,thus cheating Indians. 
         MM Singh wants to "deregulate",especially,as regards the proposed,National Manufacturing Policy,prices Diesel and other Petroleum products,so that the MNCs and Private players can profit.An excerpt from the above link:-
"That really brings us to the crux of the matter as regards under recoveries. The under recoveries of the OMCs do not mean much as long as they are covered by the tax revenue of the oil sector only when private sector players are absent from the scenario. As soon as private sector players enter the picture, the under recoveries of OMCs become a proxy for the losses of private sector players. Since the private sector wants to enter the oil sector and earn windfalls, it highlights the under recoveries and policy analysts endeavor to show it as a burden and the mainstream media faithfully relays that concern. The way to remove the under recoveries, i.e., the way to ensure a positive and high rate of profit for private capital in the oil sector is to do away with cause of under recoveries: government control over petroleum product prices. Hence, the recommendations of various “experts” is to liberalize oil prices, and the GOI, by accepting and implementing that recommendation is working to ensure high and positive rates of profit for private capital in the oil sector.
Let us end with an example that you can chew. From Petroleum Minister Murli Deora’s answer to the Lok Sabha we know that the pre-tax price of petrol was about 23.44 rupees per liter in July 2009; if Reliance or Essar sold petrol in Delhi in July 2009, this is roughly the after-tax revenue it would make on each liter of petrol. What would be an estimate of the cost that Reliance or Essar would bear for a liter of petrol? In July 2009, the average international (FOB) price of crude oil was, as we have already noted, 64.618 USD per barrel, which translates into 19.87 rupees per liter.. Thus, if Reliance or Essar imported crude for their refineries, they would pay about 19.87 rupees for each liter.
What mark-up over processing and marketing cost would they want? The average international pre-tax price of gasoline in July 2009 was about 2.33 USD per gallon; since the international price of crude oil was 1.538 USD per gallon, this implies a mark-up over processing and marketing cost of 1.515 (= 2.33/1.538). Thus, for an international oil company, the price of petrol (gasoline) was set at about 152 per cent of the cost (of crude oil). It seems reasonable to assume that Indian capital would also like a similar, if not higher, mark-up over cost. Thus, in July 2009 Reliance or Essar or Shell would have liked to be able to set a pre-tax retail price that was 152 percent of the cost of crude oil. So, what pre-tax price of petrol in India would have been required to ensure an internationally competitive mark-up over processing and marketing cost? The answer is 30.20 rupees per liter (= 19.87 * 1.52).
Now things are clear. According to the Petroleum Minister, the pre-tax price of petrol in Delhi was only 23.44 rupees per liter in July 2009; that meant, using an international rate of return benchmark, a 6.75 rupees per liter less profit for a private sector player like Reliance. That, it is clear, was enough to create a hullabaloo about under recoveries and fiscal burden and the efficiency of the market and push the government to set up the Kirit Parikh Committee and decontrol petrol and diesel prices. Profit, you see, is what this whole fuss is about."
The only MNC,in petroleum products marketing,is Shell,a reported, Rothschild firm,which started operations in Hazira as soon as MM Singh was lucky to land in the post of India' top job,the prime Minister,in 2004.
  Now let us see,if India's OMCs are making profits or "losses".THIS link provides data regarding Crude oil refining in general.
Based on prices,from THIS link,the profit is about Rs 2001.37/= per barrel of crude refined,as on 20/2/2013..
     30% of the Crude is obtained at a cheaper price locally.This is ignored in the calculations for a higher margin of safety.
Price of Indian Crude basket for 19th February,2013,is, $ 113.65;At Rs 54.29 V Dollar,the price is = Rs 6170.06/=.
lpg = 225    [Only subsidized at Rs 438.5 per 14.2 Kg,considered]
petrol = 5233
fuel  oils = 677
diesel  = 1811
atf       =  941
[Others 27.6 Litres] ignored.
Revenue = Rs 8887/=

      As per THIS link crude oil alone amounts to 90% of the total production Cost.,which works out to be,Rs 6855.62, and the Profit is = Rs 2001.37/barrel of crude,refined.
     Even after,27.6 LITRES OR 16% OF THE CRUDE,BEING IGNORED!And 30% Crude is obtained from Indian Sources at cheaper prices[ONGC,Oil India,cairn].
       Hence,one finds that there is NO LOSS at all!The OMCs are profitable.
     Hence the claim of LOSSES by the OMCs is a LIE.
    The claim of under-recoveries,which is HYPOTHETICAL,and NOT the REAL LOSSES, is another LIE,as:-
i.Refining of Crude Oil and hence the production of petroleum products is DONE in India.
iii.But,the pricing is in, US Dollars using International Benchmark,.which is UNETHICAL.
iv.  Landed Cost is MISUSED, for pricing petroleum products which is also UNETHICAL.
     Minister of Petroleum And Natural gas,S.Jaipal Reddy's reply in Rajya Sabha on 2/8/2011,is used for the following tables:-
Loss of OMCs without Government Assistance & Upstream Discount
(Rs. Crore)

Combined Profit After Tax (PAT) of OMCs
Provision for Taxation
Profit before Tax
Less : Compensation received
Budgetary support
Upstream assistance
Total Compensation
Combined loss of OMCs without compensation
- 97,247

Diesel price as on 01.08.2011
(Rs. per litre)
Price paid to refinery @ Trade Parity

Inland Freight
+ 0.69
Marketing Cost and Margin
  + 1.39
Excise Duty (including cess etc.)
+ 2.06
Total Desired Price before VAT and Dealer Commission
= 41.60
Less: Under recovery
(-) 6.06
Price Charged to Customer - Depot Price
= 35.54
Dealer Commission
+ 0.91
VAT (Including VAT on dealer commission.) *
+ 4.84
Retail Selling Price
= 41.29
                  *VAT as per Delhi.  It ranges from 26 % to 9.08 % from State to State

As informed by the Indian Oil Corporation Limited the build up of the current retail selling price of Petrol at Delhi is as under:

Petrol price as on 01.08.2011
(Rs. per litre)
Price paid to refinery @ Trade Parity
Inland Freight
+ 0.65
Marketing Cost and Margin
+ 1.47
Excise Duty (including cess etc.)
Total price after Excise duty
= 52.29
Less: Under-recovery absorbed by OMCs
(-) 00.71
Price Charged to Customer - Depot Price
 = 51.58
Dealer Commission
+ 1.50
Value added Tax (Including VAT on dealer commission.) *
+ 10.62
Retail Selling Price * *
= 63.70
*    VAT as per Delhi.  It varies from 33 %  to 15 % from State to State
** Petrol Price is decontrolled with effect from 26th June, 2010. The price break up is as per IOC.
     Ethanol Blending also increases the profit margins,[about Rs 1410 Crores per annum], of the OMCs in the case of petrol.

MORE on Ethanol Blending.The following Table is from the link above.

  The OMCs have to be Audited by The CAG.
HERE is a link regarding a PIL against the so-called "under-recoveries".The full materail in this link:-

Under recovery of oil cos challenged at Kerala high court

Mahir Haneef, TNN Oct 6, 2011, 01.23PM IST
KOCHI: The under recovery concept, which is so often cited by petroleum companies in the public domain as the reason for hiking fuel prices in the country, is under challenge at the Kerala high court through a petition filed by former ember of Parliament PC Thomas.
While political organizations here are calling for reducing taxes, PC Thomas is attacking the concept of under recovery itself, challenging that levying rates by comparing with international prices while refining is done within the country amounts to duping the public.

Prices of petroleum products are fixed by adopting Import Parity Price. The logic behind the said calculation is that had there not been any oil refining companies in the country, all petroleum products should have been imported from foreign countries. Therefore, the citizens are liable to pay for petroleum products at the import rate.
PC Thomas, who appeared at the High Court in person challenging the oil price policy, states that the central government is conveniently concealing the fact that oil production in the country is 30 per cent higher than the actual need and 25 per cent of the actual need of crude oil is extracted domestically.
Moreover, India doesn't import petroleum products but only crude oil, which is refined in refineries domestically at a much lower rate than the global rate. However, the oil companies are charging Import Parity Price for petroleum products, not of crude oil, which is unethical and is an irrational pricing method, PC Thomas contends.
The former MP is calling for a roll back from deregulation of petrol price and impose control over the same so that oil companies cannot increase the price arbitrarily. He is also seeking a court order to roll back from charging International Parity Price for petroleum products."
1.Oil PSUs are making huge profits,namely,Rs 2001.37/bbl Crude oil,refined.As many of them are OLD, Depreciation will be very much less and almost NIL.
      30% of the Crude,is obtained by the OMCs at subsidized rates from Indian Oil Cos[ONGC,Oil India,Cairn].
2.Ethanol Blending with petrol increases the profit of the OMCs by Rs 1410 CRORES per annum.
3.CAG should Audit the OMCs.
4.A regulator is required and DEREGULATION and price raises have to be rolled back.
          Deregulation is like,doing away with the Police and Judiciary,and appointing THE THIEF as the Judge, claiming that Crime rates will be down!Enron is an example of deregulation.

i.Refining of Crude Oil and hence the production of petroleum products is DONE in India.
iii.But,the pricing is in, US Dollars using International Benchmark,.which is UNETHICAL.
iv.  Landed Cost is MISUSED, for pricing petroleum products which is also UNETHICAL.

5,Reportedly,the Petroleum Sector contributes immensely to the National Exchequer and the State Coffers.
6.Private players like Mittal have joined HPCL and many others are doing the same.How come,if the Refining is a losing business?
        This further confirms that the Petroleum Sector lays Golden Eggs..........contrary to the claims of the OMCs and the GOI.
7.Under-recovery started ONLY in 2004 and is reported to be mainly,to enable, THE MNC and private players to make profits
8.The FAIR PRICE of Crude oil ,is less by about $23.Saudi Oil Minister,Naimi,has claimed in May,2012,that the FAIR PRICE of Crude is ONLY $100 per barrel!He blamed speculation for the high price.Hence Speculation by the Wall Street Bankers have to be stopped.GOI will have to take this up with WTO,or other appropriate International body.The Global Crude Oil Scam,is worth $ 2.5 Trillion,in 2009,as per THIS link.
       Derivatives should be BANNED,for fairness in cost of Commodities etc.
9.When Crude prices increase,IMPORTS have to be decreased.This will make demand less and make the price fall.It does  not make good business sense to buy Crude,even if the price is too high.
10.Various methods of buying Crude oil should be tried and the best chosen.There are reports that private players buy at a cheaper rate,by a different way of striking Contracts for Crude.
11.Oil producers like ONGC,OIL etc, have to be merged with Crude refiners,like IOCL,BPCL etc.
12.Luxury four-wheelers have to be taxed heavily.Banks should NOT offer Loans for purchase of vehicles.These will reduce,Petrol and Diesel consumption.
13.DO NOT ALLOW PPP,as malpractices are possible since CAG will not be able to audit them,and they will not come under CVC too.
14.If the OMCs are not impressed by these calculations and arguments,they can follow the following SENSIBLE,business practice, to stop "their LOSSES".
i.Calculate the "break-even" price of Crude.
ii.When Brent crude price reaches 60% of this value,start reducing imports.Adjust imports of Crude so that THE NATION does NOT LOSE!
To be continued......

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