Oil margins: Govt appoints PIDE to determine fair OMC margins
OMCs deem current regime with fixed margins unsuitable for market.
The previous govt changed the pricing mechanism from percentage terms to fixed rates. PHOTO: FILE
KARACHI:
The government has asked the Pakistan Institute of Development Economics (PIDE), a research organisation, to determine fair margins for the oil marketing companies, which have been complaining for months about low return on investment.
Ministry of Petroleum and Natural Resources sought the services of PIDE in Islamabad last month to carry out a detailed analysis of the petroleum marketing business in this regard.
The final report will be published in a couple of weeks. The institute will take financial data from oil marketing companies (OMCs) to arrive at a conclusion, industry officials said.
“Marketing companies have been seeking a revision in the pricing formula for quite some time as a fixed rupee margin can be unfeasible at times,” said Adil Khattak, Chairman of Oil Companies Advisory Committee, which represents OMCs and oil refineries.
Margins of OMCs for petrol and high speed diesel were raised by Rs0.25 and Rs0.10 respectively in April 2013. But companies complain that margins in fixed rupee terms are not suitable for the business, which involves hundreds of billions of rupees of sales.
The previous government changed the pricing mechanism from percentage terms to fixed rates, citing extreme fluctuations in international oil price that could take returns to unreasonably high levels.
“That was a valid argument. Obviously, companies would make windfall gains when oil shoots up to $150 per barrel,” said Khattak.
Initially, the Oil and Gas Regulatory Authority (Ogra) was asked to carry out the study, but PIDE was eventually assigned the task as questions were raised about Ogra’s impartiality and capacity.
This decision comes as some of the OMCs have been rolling under falling profits and losses. Shell Pakistan Limited posted a profit of just Rs59.53 million in the third April-June 2013 quarter. It incurred a loss of Rs1.764 billion in same period of last year.
The results came out last month along with a scathing statement by Shell Pakistan’s Chairman and CEO, Omar Sheikh, who talked about tough business conditions in the country.
“We continue to be affected by very low regulated fuel margins, an unfair turnover tax mechanism and continued financing cost of government receivables,” he said.
Referring to the April 2013 raise in margin and Sheikh said “Currently, these margins are not at a level sufficient to cover steadily rising direct costs of operations and high cost of financing required for investment in stocks and business assets,” adding that these regulated margins stand lowest in the region.
Shell Pakistan also highlighted continuous repercussions of turnover tax, which is eating away the industry’s profit. Instead of bottom-line profit, the turnover tax is applied on revenue.
The previous government had imposed a turnover tax of 1% on multiple industries, including the textile and oil sectors, in a bid to boost dwindling national revenues.
It was reduced to 0.5% in the previous fiscal year, but some companies continue to feel the pressure as it often exceeds the average 35% corporate tax rate. Oil companies argue that their sales run into billions but due to equally high cost of sales, profits remain very low, exposing them to an unfair levy.
In fiscal 2012-13, Pakistan State Oil (PSO) and Attock Petroleum Limited announced profits of Rs12.557 billion and Rs3.9 billion respectively. However, Attock’s profit has come down from Rs4.1 billion in the previous year. Byco Petroleum posted a loss of Rs1.4 billion in the six-month period ending December 2012.
Industry officials point out that Chevron was also quitting the country because of unfavourable returns on the petroleum sale business. Other marketing companies like Admore have also been in crisis.
Published in The Express Tribune, September 17th, 2013.
The government has asked the Pakistan Institute of Development Economics (PIDE), a research organisation, to determine fair margins for the oil marketing companies, which have been complaining for months about low return on investment.
Ministry of Petroleum and Natural Resources sought the services of PIDE in Islamabad last month to carry out a detailed analysis of the petroleum marketing business in this regard.
The final report will be published in a couple of weeks. The institute will take financial data from oil marketing companies (OMCs) to arrive at a conclusion, industry officials said.
“Marketing companies have been seeking a revision in the pricing formula for quite some time as a fixed rupee margin can be unfeasible at times,” said Adil Khattak, Chairman of Oil Companies Advisory Committee, which represents OMCs and oil refineries.
Margins of OMCs for petrol and high speed diesel were raised by Rs0.25 and Rs0.10 respectively in April 2013. But companies complain that margins in fixed rupee terms are not suitable for the business, which involves hundreds of billions of rupees of sales.
The previous government changed the pricing mechanism from percentage terms to fixed rates, citing extreme fluctuations in international oil price that could take returns to unreasonably high levels.
“That was a valid argument. Obviously, companies would make windfall gains when oil shoots up to $150 per barrel,” said Khattak.
Initially, the Oil and Gas Regulatory Authority (Ogra) was asked to carry out the study, but PIDE was eventually assigned the task as questions were raised about Ogra’s impartiality and capacity.
This decision comes as some of the OMCs have been rolling under falling profits and losses. Shell Pakistan Limited posted a profit of just Rs59.53 million in the third April-June 2013 quarter. It incurred a loss of Rs1.764 billion in same period of last year.
The results came out last month along with a scathing statement by Shell Pakistan’s Chairman and CEO, Omar Sheikh, who talked about tough business conditions in the country.
“We continue to be affected by very low regulated fuel margins, an unfair turnover tax mechanism and continued financing cost of government receivables,” he said.
Referring to the April 2013 raise in margin and Sheikh said “Currently, these margins are not at a level sufficient to cover steadily rising direct costs of operations and high cost of financing required for investment in stocks and business assets,” adding that these regulated margins stand lowest in the region.
Shell Pakistan also highlighted continuous repercussions of turnover tax, which is eating away the industry’s profit. Instead of bottom-line profit, the turnover tax is applied on revenue.
The previous government had imposed a turnover tax of 1% on multiple industries, including the textile and oil sectors, in a bid to boost dwindling national revenues.
It was reduced to 0.5% in the previous fiscal year, but some companies continue to feel the pressure as it often exceeds the average 35% corporate tax rate. Oil companies argue that their sales run into billions but due to equally high cost of sales, profits remain very low, exposing them to an unfair levy.
In fiscal 2012-13, Pakistan State Oil (PSO) and Attock Petroleum Limited announced profits of Rs12.557 billion and Rs3.9 billion respectively. However, Attock’s profit has come down from Rs4.1 billion in the previous year. Byco Petroleum posted a loss of Rs1.4 billion in the six-month period ending December 2012.
Industry officials point out that Chevron was also quitting the country because of unfavourable returns on the petroleum sale business. Other marketing companies like Admore have also been in crisis.
Published in The Express Tribune, September 17th, 2013.