April 24, 2006	Monday	Rabi-ul-Awwal 25, 1427

The Oil and Gas Regulatory Authority (OGRA) announced for the first time the prices of petroleum products on April 15, 2006 although it was established in February 2002. One should not expect that things would change for the better and benefit the consumers because the Ogra is yet not authorised to regulate the prices independently.

The Ogra has been given the job of an accountant to calculate the prices on the basis of the same straight-jacket formula provided by the ministry of petroleum under which the oil companies cartel used to fix oil prices for the last four year and mopped up billions of rupees annually, and in some cases up to 800 per cent, in profits.

Only one grey area, where the Ogra may be able to improve the situation is the annual Rs19 billion inland freight equalisation margin (IFEM) being given to oil companies to maintain uniform POL rates. The parameters of this pool are mind-boggling for the Ogra. The World Bank estimated this IFEM at 25 paisa per litre but in some cases it was being charged at over Rs5 per litre.     

It has asked oil companies to submit projected quantum and cost of oil transportation from refineries to the 29 depots in advance and then certified report of actual transportation and its cost on a monthly basis to reach at a conclusion. But this too, will have a minimal impact on per litre prices.     

The four years of a faulty oil pricing mechanism brought in by the then minister and secretary for petroleum and now defunct oil and gas advisory council and its calculation by the oil companies is a clear example of conflicting interests.     

The gravity of the situation emerged as a scam when the Attorney General of Pakistan (AGP) expressed his inability to defend the government in the Supreme Court of Pakistan due to serious illegalities of the whole mechanism.      On October 13, 2005, the AGP informed the government that the apex court has made a number of observations about the legality of petroleum price fixation by a cartel - the Oil Companies Advisory Committee (OCAC) - and that he would not be able defend the ministry of petroleum.     

“May I state that even if the functions of OCAC in terms of fixation of prices are purely mechanical it does not appear to be proper that the power to fix prices be delegated to a private body whose members are directly benefiting from such price fixation”, said Makhdoom Ali Khan.     

He wrote: “May I also draw your attention to Article 90 of the Constitution which provides that the executive   authority fo the Federation shall vest in the President and shall be exercised by him either directly or through officers sub- ordinate to him. The Secretary OCAC (a private citizen and employee of oil companies) does not fall within the functions of an officer subordinate to the President. The constitutionality of the delegation to OCAC is, therefore, questionable”.     

On the basis of these legal grounds, he advised the government that “it would be best if the process of assigning the functioning of OCAC in respect of price fixation are transferred to Ogra as early as possible and before the next of hearing”.     

This followed an order by the President to the National Accountability Bureau (NAB) to launch full-scale investigations into the matter. This sent alarm bells in the ministry of petroleum and the industry.     

Within next few days, the petroleum secretary on October 18, 2005 moved a summary to the prime minister seeking five major amendments to remove anomalies in the price fixation mechanism to save Rs12.5 billion per annum.      So much was the free fall during the last five years that the oil marketing companies and their dealers kept on charging their margins even on the government taxes, including sales tax and petroleum development levy.     

While the sale tax has been excluded from OMC’s margin, the PDL still continues to be part of it. The impact of OMC’s margin calculated after the sales tax alone comes to Rs5 billion. This is perhaps the unique example in the world where OMCs charge their profit on government taxes, instead of the other way round.       The summary claimed that the Arabian Light Crude Oil had peaked to $60.5 per barrel in August 2005 against $20 in February 2002. Similarly, it said the high speed diesel (HSD) prices touched the highest level of $68 per barrel in August 2005 from $19.70 per barrel in 2002.     

However, the petroleum minister Amanullah Khan Jadoon when asked for graphic breakdown of these price, it emerged that crude oil prices had actually peaked at $42.6 per barrel and not $60.5 per barrel as reported. Similarly, the HSD price had peaked at $53.92 per barrel and not $68 per barrel, thus showing clear over-invoicing of $13-18 per barrel. This comparison was made part of the original summary.      Similar other observations made by the minister further revealed that the profitability of four refineries had increased from 10-20 per cent of their paid up capital to upto 691 per cent in just four years, owing to an unjustified deemed duty allowed to them for expansion which never took place.     

The minister also pointed out in writing that the government and the general public was misled to believe that the pricing mechanism was approved by the Economic Coordination Committee (ECC) of the cabinet, which proved to be totally baseless.

Some specific examples of price manipulation identified by experts are worthy of note.      Under a tariff protection formula introduced in July 2002, the minimum 10 per cent guaranteed rate of return to refineries was withdrawn and in lieu of that, refineries were allowed ? custom duties as deemed duty on four product prices i.e. HSD, Kerosene, LDO and JP-4. Due to this policy all the profits were recovered from the general public and not a single penny went to the government.    

In related move, six per cent regulatory duty on other products and 11 per cent on HSD was imposed that benefited local refineries were benefited to the tune of Rs5 billion per annum as duties were included in the price setting mechanism. Only 40 per cent of High Speed Diesel is imported but is applied to 100 per cent production.     

As some products such as JP-1, kerosene oil and motor gasoline were not imported the imposition of duties on these products unnecessarily yielded billions of rupees per annum to the OMCs and refineries.     

Pakistan product price mechanism is based on import parity i.e. freight onboard FoB) Arab Gulf plus the incidentals incurred to effect it. Platts Oilgram the official reference journal started publishing 95 RON Gasoline FOB price from January, 2002 but OCAC continued to adopt old formula, i.e. Naphtha price plus maximum of $60, thus charged $30-35 per ton higher to the consumers.     

Between June 2001 and June, 2003 no product in Pakistan was considered as premium product but OCAC continuously kept on charging $1.67-2.6 per barrel premium.     

Pakistan started to import 0.5 per cent sulphur HSD from June, 2003 as premium product but as per Platts the premiums ranged from $0.8-1.3 per barrel. None of the refineries produce 0.5 per cent sulphur HSD but all through this period continued to extract premiums of product they were in-capable of producing. Estimated additional cost of this alone is Rs21.32 billion per year.       

Moreover, the practice of dumping kerosene (specific grade or not) into HSD which was under law a punishable offence was legitimised to advance benefit of Rs2-2.5 per litre of kerosene dumped which additionally polluted atmosphere.     

The OMCs, prior to October 1999 were getting fixed margins ranging from Rs0.22-0.55 per litre. Initially, it was pegged at it to two per cent of retail and then increased to three per cent and 3.5 per cent. Same happened with dealers’ commission which was increased to four per cent.     

Pakistan’s annual consumption of POL product during the year 2004-2005 was about 16 million tons. One rupee increase in per litre price of diesel alone comes to about Rs10 billion per annum.     

Meanwhile, the oil industry has started a counter pressure campaign, through different delegations and letters, to force the government to shelve the probe and continue with the old pricing formula without any change otherwise the investors with fresh investment plans would be shied away.

The question generally being asked is what would happen in case the international prices touch $100 a barrel as speculated. Iran continues to maintain that oil prices are still low indicating that these might reach that level by next year. Then? what would be strategy of the government to meet this situation specially when the oil import bill has already gone beyond $6 billion.