pricing and investments in oil & gas sector 1. historically, oil prices in india were...
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Pricing and Investments in Oil & Gas sector
1
Historically, oil prices in India were controlled by Government through cross
subsidy & pool operation. Oil companies were fully compensated based on a cost-plus
formula. The mechanism was called Administered Pricing Mechanism (APM)
Government notified Phased Dismantling of Administered Pricing Mechanism
(APM) in 1997 which commenced in 1998 & whereby all price controls were to go by
March, 2002 .
For socio-economic reasons, prices of only PDS Kerosene & Domestic LPG were to
continue to be administered and the same to be funded through the Consolidated
Fund of India.
Deregulation did start in accordance with time-table. Transport fuels also had an
initial brush with Deregulation but could not be sustained due to increasing
international prices leading to higher pump prices.
By Apr’02, except for the ‘Sensitive Products’ namely Gasoline, Gasoil, Kero &
LPG, all other petroleum products were fully deregulated.
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Petroleum Products’ Pricing – early days
From 2002 till recently, ……
International Oil prices have been on a steep rise
Selling prices of ‘Sensitive Products’ have remained under Government Control to
protect domestic consumers from volatility & runaway increase in-line with
international prices.
In contrast, Cost-price to Oil Marketing Companies (Refinery Transfer Price) has
been linked to international prices & is based on import-parity principle.
Due to this contradiction, Under-recoveries of Oil Marketing Companies (OMCs) have
also been increasing steadily.
Government of India have compensated OMCs from time-to-time during last few
years through various mechanisms :
o Sharing of subsidy burden by Upstream Companies/ Stand-alone Refinerso Issue of Oil Bondso Budgetary Support/ Cash Compensation
3
Petroleum Products’ Pricing – the difficult years
4
Pricing in Oil Sector- Kirit Parikh Report
Main Recommendations:
♦ Level Playing field and Competition
♦ Petrol- Free both at refinery gate and retail level
♦ Diesel- Free both at refinery gate and retail level
♦ Additional Excise Duty on Diesel cars
♦ Effective Distribution system for PDS kerosene &
Domestic LPG♦ Reduction in Kerosene allocation♦ PDS kerosene price increase♦ Domestic LPG price increase
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Pricing in Oil Sector- Kirit Parikh Report
Under-realization:
♦ Under-realization calculation based on IPP (existing method)
♦ Under-realization on petrol/diesel nil –free price
♦ Financing under-realization- SKO(PDS)/LPG(Dom):
• Reduction in PDS Kerosene allocation
• PDS kerosene price increase
• Domestic LPG price increase
• Mopping up portion from ONGC/OIL
• Cash subsidy from budget
♦ OMCs should be compensated fully for under-realisation
June, 2010 has seen major Government initiatives on Pricing of Sensitive
Petroleum Products ……
Pricing of Gasoline has been decontrolled
Pricing of Gasoil shall also be market-determined in a phased manner. To
start with, Retail price has been increased by Rs 2/litre to bring it closer to
market-level.
Kerosene Retail prices, that had not been changed since 2002, have been
increased 33% by Rs 3/litre.
LPG Retail prices have been increased 12% by Rs 35/ cylinder
All the above measures shall result in increased monthly cash-flows of around
Rs 1000 Cr for IOCL. This will boost liquidity & lower need for borrowings.
6
Petroleum Products’ Pricing – Recent developments
Oil Pricing Methodology
7
Administered Pricing Mechanism: Characteristics
8
Fixed parameters Cost PlusRare revisions
Assured returnsAveraging effectSupplier-
Customer linkages
Administered Pricing Mechanism
De-regulated Pricing Mechanism: Characteristics
9
Flexible parametersMarket -
DeterminedFrequent revisions
No Assured returns
Accent onLogistic efficiency
Competition
De-regulated Pricing Mechanism
De-regulated Pricing Mechanism : Options
10
De-regulated Pricing Mechanism
Import Parity
Competition-Based
Cost-BasedGovernment-Influenced
Steps in Pricing……
• Refinery Transfer Price (RTP)
• Ex-Storage Point Price (ESPP)
• Selling Price/ Retail Selling Price (RSP)
11
Import Parity Pricing Principle(for De-regulated Products)
12
FOB, Premium Landed Cost (RTP)
Ocean freight Insurance
Customs Duty
Ocean Loss Wharfage
Landed Cost RTP
Marketing Cost DLAF
Ex-Storage Point Price
Marketing Margins
Trade Parity Pricing Principle (for MS & Diesel)
13
FOB, Premium 80% of IPP +20% of EPP
Ocean freight Insurance
Customs Duty
Ocean Loss Wharfage
IPP(80%)
Marketing Cost Margins
Net wt. Avg Frt from Port to locn.
Stock Loss Working Capital
Desired Ex-Storage Point Price
FOB, Premium
Advance License benefit
Export Parity(20%)
Actual ESPP fixed by Govt is much lower than Desired ESPP
Note : MS has been decontrolled wef 26.06.10
Selling Price for Customer (Bulk Products)
Components are ……♦ Ex-Storage Point price (ESPP)
♦ State Specific cost (based on indirect and Irrecoverable State taxes)
♦ Freight (railway freight from refineries / depots to customers)
♦ Excise Duty
♦ Sales Tax & levies
Landed / Selling price for Customer14
Retail Selling Price (RSP)(Retail products)
Components are ……♦ Ex-Storage Point price (ESPP)
♦ State Specific cost (irrecoverable state taxes)
♦ Transportation Charges (from Depot to market)
♦ RPO Charges
♦ Excise Duty
♦ Dealer Commission
♦ Sales Tax & levies
Retail Selling Price (RSP)15
Cost price Principle for SKO(PDS) & LPG(Dom)
16
Landed Cost at ports (RTP)Ex-Storage Point Price at Refinery
fixed by Govt
Marketing Cost Margins
Freight from Port to locations
Stock Loss Working Capital
Cost Price at locations(Desired Selling Price as
per IPP)
Freight from Refinery to locations
Issue Price at locations(Actual Selling Price)
Difference between Cost Price and Issue Price in March 2002 Fixed as Subsidy for
2002-03 (Thereafter, reduced to 1/3rd. Current subsidy
is Rs 0.82/l for SKO & Rs 22.58/cyl for LPG)
17
Trends in International Prices
Crude :Upward Trend of FOB Prices
18
- $ PER BBL
31.8650.16
59.77 60.99
99.76
47.92
78.0781.75
1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10
Avg. FOB 38.25 55.53 67.58 66.30 83.57 69.63
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Average FOBs for the
Previous Fortnight
Petrol and Diesel :Upward Trend of FOB Prices
39.1755.98
64.9772.07
108.57
54.92
88.53
86.93
35.65
64.3073.48 73.03
125.49
52.56
85.97
94.01
1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10
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- $ PER BBL
Petrol
Diesel
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Avg. FOB : MS 45.21 61.13 77.41 80.20 88.37
76.28Avg.FOB: HSD 47.37 66.94 84.18 80.60 100.60 74.69
Average FOBs for the
Previous Fortnight
Kerosene :Upward Trend of FOB Prices
35.48
64.56
74.43 73.8
124.56
53.84
85.92
92.79
1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10
20
- $ PER BBL
Avg. FOB 47.98 70.04 83.51 79.50 103.24 75.36
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Average FOBs for the
Previous Month
LPG :Upward Trend of FOB Prices
272
388
536510
811
458
721
692
1.4.04 1.4.05 1.4.06 1.4.07 1.4.08 1.4.09 1.4.10 1.11.10
21
- $ PER MT
Avg. FOB 364 479 500 555 682 584
04-05 05-06 06-07 07-08 08-09 09-10
Average FOBs for the
Previous Month
Diesel : FOB equivalent to current(01.11.10) RSP
Current FOB & Desired RSP
Equivalent FOB & Current RSP
94.0185.11
40.66 37.71
FOB ($/bbl) RSP(Rs/Ltr)
22
SKO(PDS): FOB equivalent to current (01.11.10) RSP
Current FOB & Desired RSP
Equivalent FOB & Current RSP
92.79
34.54
28.82
12.32
FOB ($/bbl) RSP(Rs/Ltr)
23
LPG: FOB equivalent to current(01.11.10) RSP
Current FOB & Desired RSP
Equivalent FOB & Current RSP
692.00
362.64
555.29
345.35
FOB ($/MT) RSP(Rs/Cyl)
24
25
Under-realisation
Gross Under-realisation
26Projected Under-recovery for IOC for 2010-11 = Rs. 36,500 Crores (approx)
(In Rs. Crore)
Estimated Under-realisation of IOC:2010-11
1026
13184
12240
10050
MS HSD SKO LPG
27
Rs. Crores
Total Rs. 36,500 Crores
Impact
Impact of Under realization:
♦ On Profit♦ On Borrowings♦ On interest♦ On liquidity♦ On Investments♦ Physical V/s Financial performance mismatch♦ On market capitalization
28
29
Capital Investment - Needs
Capital Investment required for-
♦ Growth of Organization
♦ Updation of Technology
♦ Removal of operational bottlenecks
♦ Improvement in efficiency & productivity
♦ Enhancement of capacities
♦ Fulfillment of social objectives (Generally include Expansion, Acquisition, Modernization and Replacement)
30
Government initiative
Policies of the government - further boost to foreign investment in this industry
♦ 100% FDI is allowed in private refineries via the automatic route and up to 49% in government-owned ones.
♦ 100% FDI is also granted in cases of petroleum products, gas pipelines, exploration, and marketing or retail via the automatic route.
♦ With NELP (New Exploration Licensing Policy) it has helped encourage further explorations for oil and gas reserves in India.
31
Investment in Oil Sector- FDI
NormsActivity % of FDI Cap/Equity
Entry Route
Exploration activities of oil & natural gas fields 100% Automatic
Infrastructure related to marketing of petroleum products
Actual trading and marketing of petroleum products
Petroleum product pipelines
Natural gas/LNG pipelines
Market study and formulation
Petroleum refining in the private sector, subject to- (next slide)
Petroleum refining by the Public Sector Undertakings (PSU), without any divestment or dilution of domestic equity in the existing PSUs
49% Government
32
Investment in Oil Sector- FDI
Norms100% FDI subject to-
The existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies
33
Capital Investment
“There need to be changes in petroleum and gas pricing. If we can get international pricing of gas, then we would be happy to invest in India,” said Peter Voser, CEO, Royal Dutch Shell.
34
Thank you
Indian Oil
RSPs of MS, HSD, SKO & LPG in Neighbouring Countries
35
Prices at India(Delhi) are as on 26.6.10, prices for other countries taken as on 1.6.10
Countries MS HSD SKO LPG
Rs/litre
Rs/litre Rs/litre
Rs/cyl
India 51.43 40.10 12.32 345.35
Pakistan 36.41 41.44 35.97 577.18
Bangladesh 49.72 29.43 29.43 537.37
Srilanka 47.24 29.90 21.02 822.65
Nepal 51.36 39.24 39.24 782.84
Diesel: Desired Vs Actual RSP at Delhi (Rs/Litre)
36
32.86
36.19
48.78
28.32
42.70
40.66
29.2531.45
31.76
30.86
38.1037.71
25.00
30.00
35.00
40.00
45.00
50.00
2005-06 2006-07 2007-08 2008-09 2009-10 1-Nov-10
3.61
5.94
17.02
-2.54
4.60
2.95
Desired RSP
Actual RSP
SKO(PDS): Desired Vs Actual RSP at Delhi (Rs/Litre)
37
Actual RSP
20.68
24.83
34.32
19.30
27.74 28.82
9.03 9.08 9.09 9.22 9.3212.32
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
2005-06 2006-07 2007-08 2008-09 2009-10 1-Nov-10
11.65
15.75
25.23
10.08
18.4216.05
Desired RSP (Net of Subsidy of Rs 0.82/Ltr)
LPG(D): Desired Vs Actual RSP at Delhi (Rs/Cyl)
38
457.39 456.15
610.81
407.60
575.62555.29
294.75 294.75 294.75 279.70310.35
345.35
250
300
350
400
450
500
550
600
650
2005-06 2006-07 2007-08 2008-09 2009-10 1-Nov-10
265.27 209.94
Actual RSP162.64
316.06
127.90
Desired RSP (Net of Subsidy of Rs.22.58/Cyl
161.40