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Home > Business > Business Headline > Report

Oil and Gas: Steps on LPG subsidy necessary

February 26, 2003 10:03 IST

Reduction in excise duty to partially cushion spiraling prices is expected

Budget 2002-03 had set the stage for implementation of decision to completely decontrol the oil and gas sector. Administered Price Mechanism (APM) was dismantled. Under APM, kerosene and LPG were subsidised through higher prices of petrol and oil pool deficit (overdues to the refineries who were financing them through market borrowings). However, now government was expected to expressly provide for the subsidies on kerosene and LPG in the budget.

The pricing of petroleum products was expected to become market determined. Pricing of all the products are now supposed to be linked to international parity prices. The Oil Pool Account was dismantled on April 1, 2002 and issue of oil bonds to the concerned oil companies has liquidated the outstanding balances.

Present Industry Status:
Oil marketing companies are still bearing the brunt of LPG and SKO subsidies—Rs100/cylinder and Rs2.5/litre respectively.

During April-September of the current year, crude oil production registered a growth of 5.2% to 16.5 MT as against a fall of 3.1% during the corresponding months of the previous year. In September 2002, crude oil production stood at stagnant 2.71MT. But this was lower compared to over 2.8MT recorded in the preceding two months.  

Crude throughput grew by 5.6% to 55.53 million tonnes during April-September 2002 after growing by 4.2% (52.57 million tonnes) during the same period in the previous year. Crude throughput was higher than the year-ago level in each of the months during April-September 2002.

While APM applicable for MS, HSD, SKO and LPG has been dismantled w.e.f 1st April, 2002, subsidy on LPG and SKO has been retained by the Government. After Government's withdrawal of the APM, IOCL, HPCL and BPCL meet once a fortnight to review the prices of petroleum products. Petrol and diesel prices have been hiked at least six to seven times since the prices of petroleum products were freed from 1st April 2002. On the other hand, ONGC negotiates individually with state-run refiners on the price of its crude and has been accruing its revenues and profits at higher provisional prices.

Since 1st April, 2002, ONGC has started charging a provisional price of $21 per barrel for crude oil sold to domestic refiners. Prior to this, it was getting a cap price of $16 per barrel. Out of the $5 additional revenue, ONGC pays $ 2.5 dollars as cess on crude oil and 50 cents as taxes and duties. If the domestic crude prices are directly benchmarked against international movement, it would result in a windfall for the exploration and production company. The company expects that on finalisation of the crude pricing effective 1st April, 2002, revenue and profit figures will be further improve. Pricing of the value- added products like LPG are now based on Import Parity for all Indian producers, and the higher revenues reflect the prevailing trend of international prices. Natural Gas prices, however, continue to be administratively capped, resulting in under recoveries.

After a more than year long dilly-dallying, ultimately, in end January'03, the Cabinet Committee on Disinvestment (CCD) gave its final approval to the disinvestment (as well as the modus operandi for disinvestment) of oil refining and marketing public sector undertakings (HPCL and BPCL) while not specifying the time frame for their sale. HPCL would be privatised through sale of equity to a strategic partner. 34.01% will be sold to a strategic partner, 5% to the company's employees and the government will retain 12% equity. In case of BPCL, Govt. has decided to sell off 35.2% through public issues in the domestic and international markets. A 5% chunk will go to the employees. PSUs like ONGC etc. have been barred from biding in the disinvestments process.

But the employees of oil public sector have served a notice of indefinite strike to the government. It is being argued that the privatisation process was meant to revamp loss-making state-run companies and should have nothing to do with high-profile profit-making companies, that have been giving the government hefty dividends.

Early Feb'03, the petroleum and natural gas ministry received interim dividend cheques from the oil companies amounting to Rs 2,687 crore for the current fiscal. Total interim dividend received by the government from the six Oil PSUs, namely ONGC, IOC, Gail, OIL, BPCL and HPCL, for the current fiscal year is 82% of the total dividend of Rs 3,206 crore received in the previous fiscal. This is the first occasion when six oil PSUs have paid interim dividends on a single day.

Prevailing Tax rates:

Excise duty structure:

2001-022002-03
Light Distillates
LPG816
MS3232
Naptha1616
Middle distillates
ATF1616
SKO 816
HSD1616
LDO1616
Heavy distillates
LOBS1616
FO/LSHS1616
Bitumen1616
Others1616
Crude Oil00

Customs duty structure:

2001-022002-03
Light Distillates
LPG1010
MS2020
Naptha1010
Middle distillates
ATF2020
SKO(under PDS)510
HSD2020
LDO2020
Heavy distillates
LOBS2020
FO/LSHS2020
Bitumen2020
Others
Crude Oil1010

Industry Expectations and Recommendations: 

  1. Upward revision in price of LPG (by Rs.20-40/cyl) and Kerosene (by Re.1/litre)
  2. A reduction in excise duty to partially buffer spiraling prices
  3. Removal of specific duties on petroleum products, especially MS and HSD.
  4. A 6-7% difference between import duties on crude and petroleum products.
  5. Duty on crude should be brought down to around 8% from 10%, while that on products should be reduced to 15% from 20%.

Petroleum Federation of India (Petrofed), an association of public and private sector oil firms, has proposed the following:

- Removal of the 5% customs duty on imported liquefied natural gas (LNG) and the levying of a

uniform 4% sales tax on LNG throughout the country to promote its use.

- Infrastructure status to pipelines.

- Specific excise duty on petroleum products.

- Maintain the duty differential between crude oil and petroleum products at 10%.

 Analysts' Expectation:

  1. Cut in customs duty on crude from 10% to 8%.
  2. Reduction in customs duty on MS/HSD, FO/LSHS and ATF 20% to 15%.
  3. For LPG, SKO and naphtha, duty reduction from 10% to 8%, the same as on crude oil.
  4. For other petroleum products, reduction in duty from 20% to 15%.
  5. Government also likely to announce roadmap for subsidy reduction.
  6. Petroleum Regulatory Bill will be tabled in the Parliament during Budget session.

Stocks to watch

BPCL, Reliance and HPCL

Run-up to the Budget 2003

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