Analysis of OMC

Transactions
at

Presented by:
Namita Gupta
FMG XVII B
81091
FORE School of
Management
Concept of sale & purchase
BPCL &amongst
HPCL does notOMCs
have their
refineries in northern region still they have
their retail outlets that too conveniently
located.

How do they get supplies?

 There is an agreement among the three major
PSUs-IOCL, BPCL, and HPCL to provide the
petroleum products to each other.

Determination of Quantity
ü For the purpose of billing the quantity supplied of
the product is measured at 150 C.
ü For the products like MS, HSD, SKO the quantity is
determined in KL and for LPG it is determined in
MT.

Determination of Price
ü The products are transferred at RTP, determined
every fortnightly at headquarters of respective
OMCs.
 A comparison is being made
between the different products to
determine which are more profitable
when they are being sold through the
OMC route or through the retail
outlets.
 For the purpose of operation, Indian
Oil Corporation has divided whole of
India into 8 locations.
 Product wise analysis
The major products involved in the OMC
transactions are:
 Aviation Turbine Fuel (ATF).
 BS-III HSD (High Speed Diesel)
 Euro-III MS (Motor Spirit) commonly known as petrol
 Superior Kerosene Oil (SKO) for Public Distribution System(PDS).
Aviation Turbine Fuel
Calculation of Cost
BS III HSD
EURO III MS
Superior Kerosene Oil
Retail vs. OMC
Fig. in Rs./KL
 Interpretations
 When crude oil price is between $35 per barrel
to $55 per barrel, it is profitable for OMCs to
sell most of their products through retail
outlets.
 Even though IOC is incurring loss on sale of
SKO through retail outlet it cannot stop its sale.
 Other products are more profitable when sold
through retail outlets, but the sale has to be
made to other OMCs as per their requirements.
Retail Pricing
 Multiple Objectives of
Pricing System

Providing resources for Providing adequate incentive

the government to oil companies

Minimising impact Promoting efficient

on consumers consumption choices
Petroleum Pricing History
 Administered Price
Mechanism
o Oil companies were told how much to sell and at what price.
o APM ensured stability of prices insulating domestic market
from the volatility of prices in international markets
o A fixed level of profitability for the oil companies was ensured
subject to their achieving the specified capacity utilisation .
o The pipelines were compensated for operating costs and
return @ 12% post tax net worth.
o The S.P. of a product was arrived at by adding the applicable
freight from the oil refinery to the Depot and then to the
Retail Outlets /direct consumers. Dealers commission was
also added(wherever applicable ).
o The prices for certain petroleum products like kerosene, LPG
(domestic) were subsidized for socio economic reasons.
o Fuels like petrol, ATF, LPG for (industrial use) were priced
above the cost of production to discourage their inessential
use.
 Dismantling of APM
proposed…
 Pricing of MS & HSD to be de-controlled (April
2002)
 There was fortnightly revision of the MS & HSD
prices by the OMCs in consultation with the GoI
 Subsidy on PDS Kerosene and Domestic LPG to be
reduced
 Price Determination Post
APM
 The prices for kerosene & LPG are determined on the
basis of import parity prices
 For petrol & diesel, it is determined on the basis of trade
parity pricing model.

Import parity prices= International price +

Insurance +freight cost +customs duty.

Trade parity price= weighted average of import

parity and export parity prices in the ratio of 80:20
 Published
Policy
nMarket Determined Pricing for
MS & HSD (No Intervention in
Pricing)
nCompensation only for LPG &
SKO
nTransparent Under recovery
Compensation Package
Ground Realities
nControlling the Prices (Full
Control on Pricing)
nCompensating PSUs for all
Products
nNon Transparent Selective
Compensation Package

Manipulation of market price and non transparent

way of compensating select players for under-
recovery were never a part of published policy.
 Inadequate Price
300%
Increases…
280%
260%
240%
220%

200%
%

180%
160%
140%

120%
100%
2004 2005 2006 2007 2008
Year
Brent Crude Indian Crude basket Petrol
Diesel Kerosene LPG

Inadequate and ad-hoc price revisions

 Impact on Oil Companies
 OMCs incurring losses of Rs.60 crore/day on sale
of petrol, diesel, Kerosene & LPG*(as on 22nd
April).
• Per unit under-recovery*
Diesel - Rs.0.5/litre (over recovery)
Petrol – Rs1.40 /litre
PDS Kerosene – Rs 9/ litre
LPG cylinder - Rs 117/ cylinder
 Increasing exposure to debt for the oil companies
 Crowding out private sector participation

Source: Business Standard, 22 April 2009

Under Recovery of Sensitive
Petroleum Product
Fig. in Rs. crore
Impact of Lopsided Pricing
 Increased market distortions
 At high crude oil prices, subsidized diesel
cheaper than Fuel Oil prices
• Industries and power plants shifting from FO
to diesel
• Increased demand for diesel increasing
imports for diesel increased pressure on
OMCs

Sub optimal utilization of petroleum products

An indicator of Govt. Policy vis-à-vis
other
Most Recent Retail Price Ratio
developing Countries
Country Gasoline /Diesel Gasoline/Kerosene Diesel/Kerosene Since Product Prices are
broadly comparable net of
Argentina 1.3 1.3 1.0
Bangladesh 1.4 1.4 1.0 taxes, large deviations of
Chile 1.4 1.4 1.0 calculated ratio from unity
China 1.0 - - reflect Taxation and Subsidy
Ghana 1.1 1.3 1.2 policy of respective Govt.
Guatemala 1.3 1.2 0.9 n In no other country,
India 1.4 4.9 3.5 prices are as distorted
Indonesia 1.0 - -
as in India
Kenya 1.2 1.5 1.3
Malawi 1.0 1.3 1.2
Morocco 1.4 1.4 1.0 n Heavily Subsidized
Nigeria 0.9 1.3 1.5 fuel lead to criminal
Pakistan* 1.5 1.6 1.1 activities through
Philipines 1.1 1.0 0.9 illegal diversion
Sri Lanka 1.5 2.3 1.5
Thailand 1.0 1.0 1.0
Tunisia 1.5 2.1 1.4
n Developing countries
Uganda 1.1 1.2 1.1 are adopting other
Vietnam 1.4 1.4 1.0 means to provide
Zambia 1.0 1.3 1.3 relief to Lower Income
* Notified ex-depot prices.
Source: WorldBank/ ESMAP Report
 MS – HSD pricing
 High incidence of taxation in the MS and HSD
pricing
• 49% in the petrol retail price
• 27% in the diesel retail price

Sources: PPAC
 Kerosene and LPG
 Kerosene
• Subsidized kerosene siphoned off to adulterate
diesel
• Less than 2% of rural households use kerosene for
cooking
• 55% rural households use for lighting but is an
inefficient source of lighting
 LPG

• 76% subsidy goes to urban areas

• 40% of subsidy enjoyed by top 6.75% total
population
Source: TERI Publication ‘Petroleum pricing in India: Balancing equity and
Subsidy Delivery leads to
temptation
 Oil Bonds and Upstream
Assistance for PSUs
Fig. in Rs. crore

Since no subsidy is given to private sector, Private Oil Companies

are left with an Under Recovery of Rs 6/L on MS and Rs 9/L on
HSD

A non level playing field has been created between Public and
Private sector
Managing Volatility

Flexible taxing to manage volatility

 Ad Valorem to
Excise Duty
Specific Duties

Suggestion:
The replacement of ad-valorem portion of the excise duty to
specific duty on un-branded products as well is expected to act as
a cushion against the cascading effect of any future change in
international prices on domestic prices for consumers.
 SALES TAX RATES ON MAJOR
PETROLEUM PRODUCTS AS ON
01.06.2009

Uniform Sales Tax / VAT Combination of Duty and Tax

in States is FAIR TO Rationalization can reduce
PUBLIC unrecovered Under
Reduction in Rates will Recoveries
share central burden
with states.
 Recommendations ..
n Let us have a simple, transparent system of pricing
which is based on following postulates
• Induce consumers to use petroleum products
efficiently and cleanly
• Subsidize a consumer, rather than the product. Target
subsidies only to the deserving beneficiary segments
• Specify specific duties or levies that are transparent
and simple, not ad-volarem
• Target for One India – One Market – One rate of tax –
for petroleum products and look for other sources of
revenue generation

n Let market forces determine prices

• Appoint Regulator soonest to ensure fair play,
competition and optimal utilization of Industry
Infrastructure
 Contd…
n Let us have no discrimination between different
companies on ownership or any other criteria.
• Treat PSUs and Private players on par for oil subsidy
to create a level playing field.

n Let us learn from other developing Countries

• Study in greater depth steps being taken by countries
like Ghana, China, Thailand, Malaysia, Indonesia,
Philippines etc. and pick-up successful interventions.
Thank You!!!