Crude oil import norms review

Lesser freedom in finalising oil import procedures especially pricing further adding to higher outgo due to crude imports

The crude oil import  procedure for public sector undertaking (PSU) refiners are under review of standing parliamentary committee.

According to officials close to the development, the committee is reviewing the crude oil procurement procedure for imparting more freedom to the PSU oil refiners in pricing of the import at par with their private peers.

Officials explained that this has become necessary as oil subsidy is getting capped and under recoveries are becoming a constant problem for the PSU companies.

Lesser freedom in  finalising oil import procedures especially pricing is further adding to higher outgo on account of crude imports. Therefore it is only timely that PSUs should be given operational freedom to negotiate crude prices and other transport procedures  to save import bill on account of crude purchases.

 
The PSUs import 70-80% of their crude requirement under long term contracts and rest under spot purchases.  While the long term contracts are entered into in the beginning of the financial year at fixed prices, spot purchases are contracted depending upon the price situation and demand and supply situation in the domestic market.

Explaining the move, official said, the PSUs face a lot of procedural hurdles  even in spot purchases  which  restrict their ability to negotiate prices and lower premiums charged by the crude sellers. Under the current guidelines,  the PSU oil companies are not free to negotiate prices with crude sellers.

Even  in conditions where price negotiation is profitable, the whole procedure has to be approved by the board, explained an official. By the time , the procedure gets approved, the price fluctuations become unfavourable for  the PSU buyers.

In the process,  the PSUs are paying exorbitant premium on their purchases  as there is no scope of negotiating  the prices of the derivatives which they enter for hedging the prices of crude purchases .

There fore one of the major objective of the review is to relax the procedures and impart more flexibility and freedom to the PSU oil refiners  in negotiating the prices with the crude oil suppliers.

Another area of concern change in the pattern of shipping of the crude. Most of the private players follow "Cost and freight"  procedure where the supplier of crude arranges for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier.

However the PSUs oil refiners follow "FOB shipping point" or "FOB origin" where  the buyer or the PSU pays for  shipping cost and takes responsibility for the goods when the goods leave the seller's premises

The review is also expected  to give the companies freedom to shift to C&F method of transportation  if they find it conducive, said officials.

They stated that the norms for long term contracts, tendering process  for import of crude will remain same. Only the procedural bottlenecks will be eased so that the PSUs can negotiate prices with  overseas suppliers and save expenditure on account of the crude imports.

The crude import purchases impose a huge burden on the  exchequer as far fund outgo towards imports are concerned.
 In order to save around RS 18,000 crore annually  in the subsidy bill, the  finance ministry had suggested export parity pricing (EPP) for pricing of imported fuel products so as to do away with the 2.5% of import duty while calculating the bill for subsiding the oil companies for their under recoveries.

In response, the petroleum ministry has written to their finance counterpart rejecting the proposal as it would hit the oil public sector undertakings hard as they would have no protection against the imported products against their own refined products.