Petroleum price determination to be shifted from administered pricing mechanism (APM) to market determined pricing mechanism (MDM).
Outstanding balances of oil companies with the oil pool account (OPA) to be meet through the issue of oil bonds.
Deregulation of petroleum marketing sector. Private sector participation has been permitted in the marketing of petroleum products.
Subsidy on LPG and Kerosene to remain. Freight subsidy for transportation to far flung places will also continue. Subsidies to be linked to international prices of crude oil and will be reduced over a period of 3-5 years.
Cess on indigenously produced crude oil will stand increased from Rs 900 / metric tonne (MT) to 1,800 / MT.
LPG prices increased by Rs 40 per cylinder, kerosene prices increased by Rs 1.5 / litre, petrol prices reduced by Rs 1 / litre and diesel prices reduced by Rs 0.5 / litre.
Budget Impact
The Government has met the industry wish of sticking to the original APM dismantling schedule. This removes all confusion regarding the implementation of the schedule. Consequently, prices in the domestic market are going to be linked to international prices. Prices in the domestic market will not correct immediately to prices changes in the international markets, as import duty on petrol, diesel and ATF is 25%.
Over a period of time, the cross subsidy element on petrol will be removed leading to lowering of domestic prices. There is not likely to be much change in diesel rates assuming current crude prices. The removal of subsidy on LPG and kerosene is likely to be accretive to the topline of oil companies. The dismantling of the OPA is likely to smoothen cash flows of oil marketing companies, as funds are not blocked in the account. However, we are assuming that the Government fulfills its obligations -- arising from subsidies on LPG and kerosene -- towards these companies. The reduced stress on working capital will result in lower interest expense for the companies. The announcements are positive for earnings.
With dismantling of APM, the Government has also linked prices of crude produced by public sector units (PSUs) to prices prevailing in the international market. Currently, Oil & Natural Gas Corporation (ONGC) and Oil India Ltd. (OIL) are being compensated at 80% of international prices or $16 / barrel, whichever is lower. The new policy is likely to result in windfall gains for the companies. However, to fund the subsidies on kerosene and LPG, the Government has doubled the cess on sale of crude oil to be collected from these companies. This will reduce the upside.
The Government has indicated its stand earlier on funds blocked in the oil pool. As mentioned in the budget, the Government will issue oil bonds to these companies in lieu of funds outstanding. The bonds are likely to carry an interest rate of 7% as compared to 10% earlier. The bonds will be issued for 90% of funds outstanding. On clearance from the CAG on total funds of the company blocked in the pool, the remaining 10% will be settled.
Industry wish list
Further clarity on irrecoverable taxes like turnover tax & central sales tax post APM dismantling, as imposition of VAT has been deferred by one year.
Industry is looking for high net tariff protection in line with the recommendations of the Expert Technical Group (ETG). The recommendation should be accepted in totality, as part implementation will result in a challenging operating environment for refineries. Industry is looking for net tariff protection of 15%.
Indication on whether the complete deregulation schedule will be abided to. Further, spell out the policy on disinvestments in the energy sector.
Clarity on disbursement of subsidy on LPG and kerosene post deregulation.
Key Positives
Key Negatives
As per the original APM dismantling schedule, the Government is expected to completely deregulate prices and marketing of fuels from FY03. This could prove beneficial to refineries, as funds are not expected to remain blocked in the OPA.
Demand for petroleum products continues to experience another bad year. Consumption of diesel and kerosene are down, which has pulled down overall consumption. However, petrol, LPG and naphtha set off some of the declines.
With Government pushing forward on road infrastructure activity, the transportation sector could receive a boost. This could lead to increased demand for transportation fuels.
The global economic downturn coupled with September 11 events has resulted in drying up of petroleum product demand. While crude oil prices are down final product prices have plunged. This has maintained pressure on refining margins.
Oil prices have declined significantly in the current fiscal, especially post September 11. Brent crude prices are down from 23% to $20/ barrel. This has provided some respite to refining margins.
The Government has not declared its final decision on treatment of subsidies on LPG and Kerosene. Also, establishing a regulator for the industry is pending. With the deadline round the corner there could be some delay and/or uncertainty on the stability of these measures.
