Wednesday, 11 June, 2008

The Great Indian Oil Trick

The under-realisation on fuel sales reported by the country's oil companies is overstated by as much as 15 per cent, according to experts, though this does not mean that the oil companies are making profits on selling subsidised petrol, diesel, cooking gas and kerosene.

"A part of the under-recovery calculations is notional. It does not actually exist," said a Delhi-based analyst, who advises the country's oil companies.
The optimum or "desired" selling price is calculated assuming that the fuel is imported and then processed, transported and marketed when in fact imports accounted for 3 per cent of petrol consumption, 6 per cent of diesel consumption and a quarter of cooking gas and kerosene consumption.

The oil marketing companies calculate the under-realisation of fuel sales by taking the difference between the market price of the fuel and the subsidised selling prices. The market price is benchmarked to the price of the fuel on the Singapore exchange to which expenses such as freight, insurance and customs duty are added.

Refinery margins and processing charges are then added to this to make up what is called the refinery gate price, which is the price at which the refinery sells the fuels to the oil marketers.

The refinery gate price is calculated only for the four subsidised fuels irrespective of whether they are imported or not.

The oil marketers then add transportation charges, marketing margins and dealers' commissions to the refinery gate price to arrive at the desired selling price of the fuel.

"There is an anomaly in this calculation as the country imports only a small fraction of the petrol, diesel, cooking gas and kerosene it needs. Since there are negligible imports, import costs should not be added to calculate the under-recoveries," said an analyst with an advisory firm.

"We follow the government's policy for calculations. Prices are calculated at international market rates and the price at the refinery gate is the international market price for us," said a spokesperson of Indian Oil Corporation [Get Quote] (IOC), the largest of the three government-owned oil companies that sell subsidised products.

A senior official of another oil marketing company -- Hindustan Petroleum -- also said that the company had little say in the formula that is used to calculate under-realisations.

The under-realisation calculation is important as it is used to determine the amount of oil bonds the government gives these companies and the discounts the oil producers give as part of the subsidy-sharing mechanism.

The finance ministry has already taken cognisance of this overstatement. It pruned the under-recovery claim of the oil companies -- IOC, Bharat Petroleum and Hindustan Petroleum -- to Rs 70,000 crore last year (2007-08) from the original claim of Rs 78,000 crore by removing elements such as refinery margins.