In a major development, government may allow oil refineries to continue charging 7.5 percent deemed duty on High Speed Diesel (HSD) for a period of one year and de-regulate all the petroleum products in new oil pricing policy, Business Recorder has learnt. These products include Light Diesel Oil (LDO), HOBC, JP-1, petrol, and kerosene oil.
Sources close to Chairman Oil and Gas Regulatory Authority (Ogra) Tauqir Sadiq told Business Recorder that a high level meeting held on January 27 proposed to allow existing 7.5 percent deemed duty on HSD after oil refineries had rejected almost all the pricing formulas to determine ex refinery price.
The meeting was attended by officials of Petroleum and Finance ministries and Ogra. "After one year, the ex refinery pricing mechanism with deemed duty will be reviewed and Ogra will work out a new pricing mechanism without deemed duty," the sources said.
However, Secretary Petroleum Mahmood Saleem Mahmood told Business Recorder that a final decision to allow 7.5 percent deemed duty for one year was not taken, saying it was just a proposal. "More exercises would be carried out to reach at consensus after taking all stakeholders into confidence," he added.
The Justice Bagwandas Commission in its report had recommended elimination of deemed duty from the pricing mechanism. An expert committee on oil pricing comprising oil experts and economists was constituted following the recommendations of the Commission.
It had proposed removal of 7.5 percent deemed duty on HSD but during a recent meeting held on January 27, it was noted that all the refineries were operating on losses and only Pak Arab Refinery (PARCO) had earned a nominal profit during the last year 2009.
"If oil refineries are not allowed to charge deemed duty on HSD, they might shut down due to losses," sources said, adding that oil refineries had requested that deemed duty be raised to 10 percent from existing 7.5 percent. "But refineries request was turned down regarding the raise in deemed duty on HSD," the sources added.
They maintained that in the meeting many decisions were taken. The Judicial Commission had recommended de-regulating HOBC, LDO and JP-1 but during the meeting it was decided to de-regulate other petroleum products including motor spirit (MS) and kerosene oil. "However Ogra will monitor the prices of these products," the sources noted.
The Commission had recommended fixing General Sales Tax (GST), Oil Marketing Companies (OMCs) and dealers'' margins in absolute per litre rupee terms as fixed for HSD. Finance Ministry had ruled out the fixation of GST on petroleum products, saying that Parliament had the powers to fix it.
Sources said that the margins of petrol and kerosene oil might be fixed in terms of per litre rupee at the level of $66 per barrel of crude oil. According to Ogra working, the existing margin of OMCs on MS and kerosene oil is Rs 1.69 per litre and Rs 1.78 per litre, respectively, that might be reduced to Rs 1.50 per litre and Rs 1.60 per litre under the proposed mechanism.
The existing dealers'' margin on petrol is Rs 2.12 per litre that might be cut to Rs 1.90 per litre. The commission had also recommended controlling de-regulation of Inland Freight Equalisation Margin (IFEM) by replacing it with primary transportation charges to be built in ex-depot sale price.
According to Ogra estimates, the total financial impact of IFEM de-regulation for 2009-10 will be Rs 28.390 billion that includes Rs 14.587 billion for OMCs and Rs 12.9 billion for PARCO and R 829 million for ARL. OMCs and oil refineries will charge transportation cost under deregulated mechanism. The committee on oil pricing had conducted a series of exercises on ex refinery pricing but oil refineries had rejected all the proposed formulas.
However, they insisted on allowing 10 percent minimum guaranteed rate of return irrespective of the pricing formula. In a meeting held on January 19, oil refineries had requested that the existing import parity formula with deemed duty be allowed to continue after some modifications. Finance Secretary had supported the oil refineries point of view to continue existing formula with some amendments.