Ioc, Sci Yet To Fix Price Formula

Indian Oil Corporation (IOC) and Shipping Corporation of India (SCI) are yet to reach an agreement on replacing the cost plus formula for pricing of crude oil and petroleum product shipments.

Official source said here that although the administered price mechanism for the petroleum sector was partly dismantled in April, no formal price mechanism has been devised to replace the cost plus formula that was followed till then for shipment of petroleum products.

The cost plus formula ensured pricing of oil shipments on the basis of a 12 per cent return on equity, plus interest, operation and maintenance costs. This formula facilitated full recovery of both fixed and variable costs incurred for oil shipments by SCI. Even at these rates, the impact on the retail price of oil was slightly under 1 per cent.

However, IOC has been insisting on freight rates linked to a competitive market price system. In this market system bids are invited directly from shipping companies, though Indian companies are expected to receive priority for such shipments. Unless there is shortage of shipping capacity, foreign companies are not allowed to bid. Foreign bids are handled through TRANSCHART, the shipping agency for government and public sector companies under the surface transport ministry.

The current problem is typical where shippers would not want to lock into high tariffs. Shipping firms prefer locking into time charters where the market rates are advantageous. While SCI has been insisting on entering into time charters for pricing of oil shipments, IOC is prepared to work out charter rentals only on a spot basis where pricing is done on the basis of a voyage charter.