Oil refineries and Oil Marketing Companies (OMCs) on Monday requested the government to review oil prices on a fortnightly basis instead of monthly to secure them from margin losses due to fluctuation in global oil prices. They also sought increase in deemed duty on High Speed Diesel (HSD) from 7.5 to 10 percent to save the industry from losses.
Sources told Business Recorder the issue was discussed at a high-level meeting here. "The average price in the past month was taken to calculate the oil price in the country and higher oil price of crude oil in international market has put oil refineries in negative Gross Refinery Margin (GRM)," said one of the participants of the meeting. The fortnightly price fixation system was changed to monthly effective February 1, 2009. Due to sharp increase in POL prices in international market, the profitability of refineries and OMCs margins increased substantially during 2008-09.
The deemed duty on HSD was reduced from 10 to 7.5 percent effective August 1, 2008. Oil refineries representatives revealed in the meeting that due to reduction in deemed duty, the profitability of oil refineries had declined. It was noted that National Refinery Limited (NRL) had faced a loss of Rs 157 million, PRL, Rs 672 million and ARL Rs 553 million during the first quarter of 2009-10.
Representatives of oil refineries maintained that refineries had incurred huge loss during 2008-09 due to sharp decline in global oil prices and almost negligible Guaranteed Return (GR) for the refineries under the existing scenario. They pointed out that the rupee-dollar parity had a major negative effect on profitability. "Therefore, the government decision on review of the ex-refinery pricing formula needs to be taken seriously and immediately to support the refineries to continue their operation," they said.
Sources said oil industry had been directed to submit detailed proposals to the Petroleum Ministry to review the refinery policy to secure the industry from losses. "A high level meeting will be held after Eid to review the proposals submitted by the industry," sources added. Earlier, the sub committee of the Economic Co-ordination Committee (ECC) had finalised a report in which it had recommended enhancement of deemed duty from existing 7.5 to 10 percent with an upper cap at 70 dollars per barrel of crude oil.
Oil refineries have also sought permission from the government to hedge crude oil price and foreign exchange cover (dollar) to defuse the impact of fluctuations in the oil price as well as depreciation of the rupee against the dollar in future. "Oil refineries have also been directed to submit joint proposals for hedging plan of crude oil prices and foreign exchange cover for consideration," sources said.
The meeting was informed that almost all the special reserves generated under the current ex refinery formula had been consumed to offset the losses and the amount left in the reserves is inadequate to raise equity to undertake any project for expansion/upgradation of the refineries. They sought incentives to set up the project especially Hydro De-Sulphurization. Refineries requested that the completion dates of Hydro De-Sulphurization (HDS) project should be reviewed as there had been a delay in the finalisation of the amendments to the existing ex refinery formula.