The Oil Companies Advisory Committee (OCAC) is following a set pattern of formula and is giving comfort from the ever-rising oil prices. The government intervened and adjusted its petroleum development levy and, in turn, it faced substantial revenue falls in the past two years.
It has long been debated in government circles to hand over the responsibility of setting domestic POL prices to the government regulatory body, Oil and Gas Regulatory Authority (Ogra), from the current private entity of Oil Companies' Advisory Committee (OCAC), which is a forum of oil and gas marketing and oil refining companies.
Due to the soaring oil prices on the international front and the resultant increase in domestic POL prices, the general perception has been that the exorbitant increases in prices over the last year and a half were to enhance profitability of these companies at the expense of the consumers at large. Therefore, in order to maintain a check on this presumed discrepancy, the government is considering to taking the responsibility in its own hands, through Ogra.
Following the government's move towards deregulating various industries, the fortnightly oil price revision was handed to OCAC on July 2001. The fact remains that the pricing formula, which is directly linked with international oil prices, was also passed on and is to-date being practised by OCAC.
In the light of the soaring oil prices, the government intervened by adjusting the Petroleum Development Levy (PDL) to restrict prices from increasing further and give some relief to the general public. OCAC follows a set formula to determine oil prices together with a frequent involvement of the government in recent times.
Therefore, Jawad Haleem, research analyst at Atlas Investment Bank, felt that it was to a large extent redundant to make this organisational shift within the oil industry as no benefit is anticipated to be passed on to the end-user, which is in effect the aim of this entire debate.
He said that domestic POL prices for the next fortnight remained unchanged at their previous levels as announced by OCAC. Despite an increase in oil prices internationally during the fortnight, prices were maintained domestically as they remained unchanged during the last review when in actual facts they warranted a decline. POL prices have now been kept constant at current levels since mid-October.
OMC SCENARIO: The Oil Marketing Companies (OMCs) in general witnessed a terrific performance during the last year and the first quarter of this year. The major factor responsible for this persistent outperformance in their profitability over these two periods has been the surge in domestic POL prices following burgeoning oil prices on the international front.
Despite the government's efforts to curtail price increases by way of taking a burden on itself, domestic prices on average rose by 22 percent during FY05, and have risen by a similar amount during just the first half of the current fiscal year. OMC margins fixed at 3.5 percent of the final price have hence grown proportionally from Rs 1.3/litre of Motor Gasoline (MoGas) at the end of FY04 to Rs 2.0/litre presently whereas margins on High Speed Diesel (HSD) have soared from Rs 0.9/litre to Rs 1.3/litre during the same period.
INDUSTRY SALES PERFORMANCE: Contrary to the boost received in terms of high oil prices, earnings of OMCs were restricted during the first quarter of FY06 due to depressed sale volumes of various products. Sales of MS and HSD fell during the first four months of the year by 7 percent and 8 percent, respectively, mainly due to a large-scale conversion of automobiles to CNG. The LDO and fuel oil sales depicted a 42 percent and 25 percent decline, respectively, on the back of high water availability thus lowering demand from thermal power plants that requires fuel oil. On the other hand, sales of Jet fuel rose by 21 percent during the period under review due to growth in the aviation business world-wide.
"In view of the sales performance so far, we anticipate a 6 percent decline in overall sales during FY06 to 14.3 million tons from 15.2 million tons in FY05. However, we expect the price increase to more than offset this setback and foresee an improvement in OMC profitability this year, too, with PSO as our pick of the sector."
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