The Competition Commission of Pakistan (CCP) has asked the Oil and Gas Regulatory Authority (Ogra) and Ministry of Petroleum and Natural Resources to eliminate discriminatory application of inland freight equalisation margin (IFEM) and create a level playing field for all refineries and oil marketing companies.
In an opinion issued on Thursday, the CCP took notice of the concerns raised by an oil refinery over denial of IFEM benefits to it, which put it at competitive disadvantage compared to the refineries receiving the freight margin.
The commission held a public hearing on the issue at its headquarters, which was attended by representatives of the petroleum ministry, Ogra, refineries and oil marketing companies.
IFEM is the cost borne by a refinery for transporting crude oil from the source to the refinery and by an oil marketing company for shipping the finished product from the supply point to depots in the country.
The purpose of IFEM is to ensure uniform prices of motor gasoline (petrol), high-speed diesel, light diesel oil and kerosene oil across the country.
According to the CCP, Ogra denied the transport cost of crude oil to the refinery in the wake of decisions taken by the Economic Coordination Committee (ECC). In its first decision, the ECC disallowed crude transport cost to the refinery, but later it gave the go-ahead. However, the petroleum ministry did not seek the ECC’s approval for withdrawing the earlier decision.
The CCP asked which decision should be applied in the case of two conflicting directives and noted that courts had held that the judgment coming later in date and time would prevail. From the available documents, the CCP said, it stood clarified that the ECC had allowed reimbursement of transport cost to the refinery from IFEM.
The CCP observed that investment incentives given to allow players to enter the market or expand their business could not be offset by denying benefits normally offered to existing market players.
Furthermore, the IFEM pool is an indirect subsidy given to residents of the country by covering transport costs of refineries and oil marketing companies to ensure that their products are available to the consumers at a uniform price across the country.
“Denying access to the IFEM pool on the grounds that the refinery has enjoyed investment incentives and is a private sector entity, results in distorting competition in the market,” the CCP remarked.
Though the ECC allowed the refinery reimbursement of the operational cost of its Single Point Mooring (SPM), Ogra denied it, arguing that the refinery was saving wharfage charges as it imported crude oil through its own SPM, the CCP said. “Therefore, allowing the operational cost of SPM may lead to double reimbursement to the refinery.”
The CCP referred to a letter issued by Ogra to the commission, which stated that in case of local crude, the producers supplied the product to the refineries at their gate, therefore, no freight was incurred by the latter. However, according to the pricing mechanism approved by the federal government, the ex-refinery price allowed to the refineries included wharfage as well.
“This means a refinery situated in a hydrocarbon rich area and using local crude oil, does not have to pay crude oil transport cost, but it is still given ex-refinery price containing wharfage. Inclusion of wharfage in the ex-refinery price and the operational cost of SPM are two different matters,” the CCP said.
“Hence, reimbursement of the operational cost of SPM is justified on the same principle by which transport cost is reimbursed to other refineries from the IFEM pool.”
Published in The Express Tribune, August 8th, 2014.
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