Exercise to assess oil firms' losses

The government is carrying out an exercise to calibrate the exact quantum of under-recovery by oil companies.

The first since 2002, the exercise follows the change in the pricing model from import parity to trade parity and the change in the duty structure of petroleum products.

Officials said the Oil Industry Development Board, the ministry of petroleum, the oil companies and the Chief Advisor of Costs, under the Ministry of Finance, would jointly undertake the exercise.

Till now the government has been using the figure of Rs 73,000 crore as the under-recovery, taking into account import parity prices and a crude price of $70 per barrel.

The under-recovery estimate under the new exercise is expected to be lower owing to the change in the pricing mechanism. So far, the pricing mechanism has been based on the landed cost of imports, including Customs duty, irrespective of the quantum of petroleum products sold domestically.

The government is now shifting to trade parity pricing under which the prices of petrol and diesel would be a weighted average of the import and export parity prices in a 80:20 ratio.

This means that 80 per cent of the price would be determined by the landed cost (which includes Customs, freight and insurance) of the product and the remaining 20 per cent by the prices at which the petroleum product is exported.

Officials admitted that the exercise had been prompted by certain political parties that believed the under-recoveries of oil companies to be notional.

While no time-frame had been set to complete the task, officials said the finance ministry would review the progress after one month.

They added that besides price revision, the government wants oil companies to re-visit their costs and efficiencies.

"The Cabinet on Monday also discussed the need to focus on energy conservation," an official said, adding that the possibility of getting all retail outlets to display the economic cost of petrol and diesel was considered.

"There was a view that public opposition to a price revision should be tempered by creating awareness about the quantum of subsidies provided by the government. Such display at retail outlets would list out what the actual price should have been without the subsidy and what is the subsidised price being actually paid by the consumer," an official said.