Presentation to Secretary MOPNG

1
Impact of Deregulation
2
Background

• Report Of The Study Group On Hydrocarbon
  Perspective 2010 (Sunderrajan Report)
• Report Of The Strategic Planning Group On
  Restructuring Of Oil Industries (R Group)
• Policy Announcement On September 2, 1997
• Import Parity for HSD, FO, Naphtha and LSHS
• Bitumen Pricing Freed
• Implementation of Deregulation
• Naresh Narad Committee Report (June 01)

3
Expert Technical Group

• Constituted in June 1996
• Chaired By Joint Secretary (Refineries)
• Report Submitted in Sept 1997
• Cabinet Approval in November 97

4
Cabinet Approval

• Withdrawal In Phases starting April 1998 ending
  March 2002
• APM withdrawal
• UpstreamOil Producers
• Downstream Refineries
• Downstream Marketing
• Other Associated Changes
• Regulatory Framework For Hydrocarbon

5
Oil Producers

• Crude Price
• Cost Plus Formula Withdrawn w.e.f. April 98
• Price Charged to Refineries Import Parity
• Price Retained wt. Avg.. FOB of actual imports

6
Oil Producers

• Percentage of FOB retained by NOCs (ONGC
  OIL)
• 98-99 77.5
• 99-00 80.0
• 00-01 82.5
• 01-02 Decontrolled
• Pool SurrendersDifference between Price charged
  Price retained

7
Refineries Retention Pricing - Abolished W.E.F.
April 98

• N0 12 POST TAX RETURN ON RETENTION CONCEPT
• Crude Cost Import parity including Customs Duty
• Crude Imports
• PSUs Canalised thru IOC upto March 02
• JV Private Refineries Allowed thru Actual User
  Licensing
• Crude Transportation Decontrolled
• Crude Tankers at Market Price

8
Refineries Retention Pricing - Abolished wef
April 1998

• Product Realisation
• Existing Refineries Adjusted Import Parity Price
  for Controlled Products
• Controlled Products
• MS, HSD, SKO, LPG and ATF(upto March 01)
• Other ProductsMarket Driven Prices
• Naphtha, FO, LSHS, Bitumen, Waxes, ATF(wef.01)
  etc.
• New Refineries Tariff Adjusted Import Parity
  Price (TAIPP)
• Pool Adjustments Abolished

9
Marketing

• APM for Controlled Products (upto 03/02)
• Product Prices brought in line with Import Parity
  in phases
• Products decontrolled w.e.f. April 98
• Naphtha, FO, LSHS Waxes
• ATF Deregulated eff. 1-4-2001
• Products to be decontrolled March/02 MS, HSD,
  LPG (domestic)and SKO
• Import Restrictions on
• NGL, MS and HSD
• Other products decanalised

10
Marketing

• Subsidy for far flung areas
• To be absorbed by the Union budget
• Entry Barrier to Marketing of Transportation
  Fuels i.e. MS, HSD and ATF
• Hurdle set at
• Owning Operating Refineries with an investment
  of Rs 2000 crores
• Crude oil production of 3 MMT p.a.

11
CompetitionMarketing Refining

• Competitors For OMCs (Today 3, Eff. 03/02)
• MNCs - Exxon, Shell, Caltex, Mobil etc.
• Domestic Private Refineries - Reliance, Essar
• Domestic PSU Refineries - KRL, CPCL, BRPL
• Domestic Mkt. Cos - IOC, BPC, IBP
• Domestic Refinery JVs - BORL, NRL, MRPL
• Domestic Oil Producers - ONGC, OIL
• Domestic Oil Producing JVs

12
Implications For OMCs

• On Investment Decisions
• On Refineries
• On Marketing
• On Profitability
• On Future Direction JVs

13
On Investment Decisions Refineries

• Refineries
• Investments to be only on Commercial
  Considerations
• No 12 Post Tax Return

14
Implications For Refineries

• Profitability dependent on
• Crude Cost Evaluation
• Yield , Product Realisation and Fuel loss
• Crude Import Product Slate Planning
• Product Pricing Free Products
• International Market Information
• FOB for Alternate markets
• Freight costs/Logistics/Tax Rules
• Regularity

15
Impact On Refineries

• Achieving the Throughput
• Optimum Distillates
• Minimising Fuel Loss
• Cost Controls, Monitoring
• Selection of Crude
• No Unplanned shut-downs

16
Accounting Issues

• Costing Of Products
• Valuation Of Inventories
• High Working Capital
• Identification of cost centers
• Crude loan transactions
• Budgeting
• Raw materials
• operating costs
• profits

17
Marketing Issues

• Higher Inventory costs
• Higher Insurance Costs
• Working capital requirement gone up
• Increased Purchase and Turnover Taxes
• Freight under recoveries for inland movement of
  decontrolled products
• Competition from free imports and margin squeeze
• Logistics/Credit/Discount

18
Implications For Marketing

• Inter Oil Company Contracts
• Product Exchange Understanding
• Sharing Of Margins -Free trade

19
Impact On Profitability

• Refinery Profits
• Contingent upon
• Crude Purchase Economy
• Freight
• Distillate Yields
• Cost Pressures From
• Salary Revision
• Repairs Maintenance
• Product Quality Upgradation Requirement

20
Impact On Profitability

• Marketing Profit
• Margins higher from decontrolled products
  Initially
• Come Under Squeeze with competition
• Cost Pressures From Competition