The Comptroller and Auditor General of India in its latest report stated that Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp overcharged customers by Rs 26,626 crore from 2007-08 to 2011-12 by charging notional levies like customs duty on fuel they sold.
In comments on CAG observation, the ministry defended the pricing methodology followed by the oil marketing companies (OMCs) of calculating the desired retail price in a manner as if the product was imported - adding customs duty, freight, insurance, ocean loss and wharfage charge to prevailing international price of petrol, diesel, LPG or kerosene.
This they do because they import nearly 80 per cent of their raw material (crude oil) need and pay import parity price for the oil they buy from domestic producers, official sources said.
The retail price for diesel, LPG and kerosene has always been lower than cost and the difference has been met through subsidy support.
"As against the stated benefit of Rs 26,626 crore, OMCs were asked to bear the under-recoveries amounting to Rs 28,680 crore during the same period from 2007-12. Hence, no undue benefit was available to OMCs in the existing pricing mechanism," a source said.
Refining is a cyclical industry characterised by very volatile prices. Providing some level of protection and thereby adequate refining margins is necessary for encouraging investment in expansion, and more importantly in modernisation of domestic refineries. Failure on this front can impede our quest for energy security.
Also, the profit margins of OMCs are only around 1 per cent of their total turnover which are the lowest as compared to the global peers -- 10 per cent of Exxon Mobil, 11.2 per cent of Chevron and 7.6 per cent of Brazil's Petrobras.
Similarly, as compared to the profit margin of their PSU peers in energy sector -- NTPC (17.5 per cent), Coal India (21.9 per cent) and ONGC (26.5% per cent), the profit margin of OMCs are negligible, they said.
Sources said during 2007-08, 2008-09 studies were conducted by the Cost Accounts Branch of Department of Expenditure, in Ministry of Finance to work out the amount of under-recoveries of the OMCs under the current methodology and actual refinery cost method.
Similar study was also conducted for the period April- September 2010 and 2011-12. Only small differences were observed in the under-recovery amount worked out kinder both the mechanisms, they said.
Currently, there is no customs duty on crude oil while a 2.5 per cent import duty is charged on inward shipment of petrol and diesel. During post part of the audit period, crude oil attracted a 5 per cent customs duty, while a 7.5 per cent import duty was levied on products.