The under-realisation on fuel sales reported by the country's oil
companies is overstated by as much as 15 per cent, according to
experts, though this does not mean that the oil companies are making
profits on selling subsidised petrol, diesel, cooking gas and
kerosene.
"A part of the under-recovery calculations is notional. It does not
actually exist," said a Delhi-based analyst, who advises the country's
oil companies.
Oil companies say calculations based on pre-defined government
formula
Calculation assumes import cost of petrol, diesel, LPG and Kerosene
Imports of petrol & diesel are negligible
Govt pruned Rs 78,000 cr under-realisation claim of oil companies to
Rs 70,000 cr last year
The optimum or "desired" selling price is calculated assuming that the
fuel is imported and then processed, transported and marketed when in
fact imports accounted for 3 per cent of petrol consumption, 6 per
cent of diesel consumption and a quarter of cooking gas and kerosene
consumption.
The oil marketing companies calculate the under-realisation of fuel
sales by taking the difference between the market price of the fuel
and the subsidised selling prices. The market price is benchmarked to
the price of the fuel on the Singapore exchange to which expenses such
as freight, insurance and customs duty are added.
Refinery margins and processing charges are then added to this to make
up what is called the refinery gate price, which is the price at which
the refinery sells the fuels to the oil marketers.
The refinery gate price is calculated only for the four subsidised
fuels irrespective of whether they are imported or not.
The oil marketers then add transportation charges, marketing margins
and dealers' commissions to the refinery gate price to arrive at the
desired selling price of the fuel.
"There is an anomaly in this calculation as the country imports only a
small fraction of the petrol, diesel, cooking gas and kerosene it
needs. Since there are negligible imports, import costs should not be
added to calculate the under-recoveries," said an analyst with an
advisory firm.
"We follow the government's policy for calculations. Prices are
calculated at international market rates and the price at the refinery
gate is the international market price for us," said a spokesperson of
Indian Oil Corporation (IOC), the largest of the three government-
owned oil companies that sell subsidised products.
A senior official of another oil marketing company — Hindustan
Petroleum — also said that the company had little say in the formula
that is used to calculate under-realisations.
The under-realisation calculation is important as it is used to
determine the amount of oil bonds the government gives these companies
and the discounts the oil producers give as part of the subsidy-
sharing mechanism.
The finance ministry has already taken cognisance of this
overstatement. It pruned the under-recovery claim of the oil companies
— IOC, Bharat Petroleum and Hindustan Petroleum — to Rs 70,000 crore
last year (2007-08) from the original claim of Rs 78,000 crore by
removing elements such as refinery margins.
The oil companies were projected to lose Rs 245,000 crore in 2008-09
before fuel prices were increased and duties on petroleum products cut
last week.
The under-realisation is now expected to fall to around Rs 200,000
crore assuming crude oil import prices of $125 per barrel. This will
be partially made up through a combination of oil bonds and discounts
by oil producers, while the marketing companies will also take a hit.
The actual under-realisation however may be much lower. " Even if
there is a change in the way under-realisation are calculated, all it
will do is reduce the under-realisation by around 15 per cent, but
will not wipe it out, " said another official with IOC, which sells
almost half the total fuel sold in the country.
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