The Economic Co-ordination Committee (ECC) of the Cabinet has accused oil refineries of involvement in forgery on losses and misusing deemed duty being collected from the consumers, official sources told Business Recorder on Thursday.
The summary titled, "Ex-refinery pricing formula for National Refinery Ltd (NRL) Pakistan Refinery Ltd (PRL), Attock Refinery Ltd (ARL) and Bosicor Refinery," had been submitted by the Petroleum Ministry on March 28 to increase deemed duty from 7.5 per cent to 10 per cent.
A lengthy debate took place in the ECC on April 13 on utilisation of deemed duty collected by the refineries, financing of Hydro De Sulphurisation (HSD) projects and huge profits made by them through this facility. "Refineries awarded huge dividends to their shareholders out of the money collected through deemed duty instead of making investments in HSD projects. Losses shown by the companies are inventory-related and not real operational losses, which do not comply with the best international practices," the sources quoted the ECC as saying.
A committee, headed by Prime Minister's Advisor on Petroleum Dr Asim Hussain, will investigate as to how the powerful refineries misused deemed duty. Other members of the committee will be Minister for Information Qamar-uz-Zaman Kaira, Minister for Privatisation Naveed Qamar and Secretaries of Finance, Petroleum, Planning Division and Revenue Division.
The committee would examine all aspects contained in the proposals of the Petroleum Ministry, which was discussed in the ECC and submit its report in the next meeting. The sources said that some of the ECC members also feared that the timing of these proposals was not appropriate as their approval would result in increase in prices of petroleum products and that would directly affect the common man and also lead to further rise in inflation.
It was further stated that the pricing formula of the petroleum products was under review of the commission appointed by the Supreme Court of Pakistan. According to the summary, a copy of which was made available to this correspondent, the IPP formula for refineries was introduced in 1992-93 with the approval of the ECC under which the ex-refinery prices were linked with the published prices of petroleum products in the Platts Oilgram and guaranteed Rate of Return (RoR) 10-40 percent.
The IPP formula was modified in 2002 when the minimum 10 percent guaranteed rate of return with upper limit of 40 percent was done away and a tariff protection was allowed to NRL, PRL and ARL, ie customs/deemed duty of 10 percent on High Speed Diesel (HSD) and six percent on Kerosene, Light Diesel Oil (LDO) and Jet Propulsion (JP-4) in their ex-refinery prices, to operate on self financing basis. Also profitability was capped at 50 percent for distribution of dividend.
The formula was further revised in 2007 and 2008 by removing the six percent deemed duty on Kerosene, LDO and JP-4/8 through budgets. While in case of Bosicor, there was no such condition of upper cap of 50 percent on their profitability as it was set up at its own risk and cost without any government guarantee.
On July 30, 2008, the ECC approved reduction of deemed duty on HSD from 10 percent to 7.5 percent and also revised formula for ex-refinery prices of Motor Spirit 87 Research Octane Number (MS 87 RON) and High Octane Blending Component (HOBC) 97 RON by linking with the published Arab Gulf Market MS 95 RON price on prorata basis.
The Petroleum Ministry claimed that since July 2008, the international oil prices decreased sharply and heavy losses incurred to the refineries during July-December, 2008. The refineries have requested for review of the pricing formula to avoid their closures.
Various options, including restoration of guaranteed rate of return, processing fee and fixed refinery margins was discussed with refineries for revision of pricing formula, the summary revealed. After a series of meetings with the refineries, a consensus was arrived on modification in the existing formula as follows:
-- Customs/ deemed duty on HSD be increased from 7.5 percent to 10 percent with capping at 80 dollars/bbl price of Arab Light crude oil. The estimated impact on HSD price will be Rs 0.62 per litre based on February international market prices.
-- The existing formula of RON penalty for MS 87 RON and HOBC 97 RON be replaced with the formula earlier proposed by the World Bank, which is "price differential of Singapore MS 95 and 92 published in Platts Oilgram, will be divided by three to arrive at unit RON rate and then multiplied by eight, ie (price of MS 95 - price of MS 92)/38. RON adjustment factor for HOBC 97 RON will be calculated on similar pattern."
-- The ex-refinery price of MS 87 RON will reduce by about Rs 1.24 per litre based on February international market prices. However, based on prices in international market, the impact can be both ways.
-- The cost of HDS project after adjustment of special reserves be recovered from consumer by loading the per litre cost on country volumes of HSD over a period of five years, effective from January 1, 2010 ie after award of Engineering, Procurement and Contracts (EPC) by December 31, 2009.
The estimated impact worked out is Rs 1.20 per litre, which will be added to petroleum development levy (PDL) on HSD price and will be reimbursed monthly by the Finance Division on submission of duly audited/certified claims by the refineries.
In case the refineries fail to comply with the schedule, they will have to refund the entire amount recovered from the proposed pricing mechanism with interest and will not be allowed to market their product due to variance of notified specification of HSD.
A forward cover on foreign exchange to refineries on import of crude be allowed, subject to the Ministry of Finance/State Bank of Pakistan (SBP) Rules. The effective date for applicability of revised formula will be the next price review after the ECO decision, the summary suggested.
Under the existing formula, NRL, PRL and ARL are required to transfer amount of their profit over and above 50 percent of its paid-up capital as of June 30, 2002 to a special reserve, which is meant for expansion, modernisation and to offset future losses, if any.
It has been agreed with the refineries that their paid-up capital as of June 30, 2008 will be treated as benchmark for calculation of profit over and above 50 percent to be transferred to special reserve. However, the Bosicor refinery paid-up capital will be limited to rupees one billion, against their actual paid-up capital of Rs 3.9 billion, the summary claimed.
According to the summary, the Oil Companies Advisory Committee (OCAC) has recommended to allow Bosicor refinery the reimbursement of crude freight from Inland Freight Equalisation Margin (IFEM), common freight pool being managed by the Oil and Gas Regulatory Authority (Ogra).
Out of the total estimated freight of Rs 473 million, worked out by Bosicor on transportation of crude oil, the Ministry proposed to reimburse only to the extent of proportionate share of MS and HSD extracted from the crude oil, which is estimated as Rs 224.48 million per annum.
The Ministry of Petroleum recommended reimbursement of freight on crude oil to the extent of proportionate share of MS and HSD only from common freight pool. The estimated impact on MS and HSD price will be Rs 0.02 per litre each.
Bosicor refinery is also being declared as installation/depot for supply of petroleum products and recovery of IFEM. The sources said the Ministries of Finance, Planning and the Federal Board of Revenue (FBR) has concurred the proposal.
The Finance Ministry, however, set the condition that increase of customs/deemed duty on HSD to 10 percent would be subject to cap at 70 dollars/bbl from July 1, 2009 to be reviewed annually. The Finance Ministry also rejected a proposal regarding revision of MS RON penalty formula, financing of HDS project and provision of forward foreign exchange cover.