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Pricing and Investments in Oil & Gas sector

Pricing and Investments in Oil & Gas sector. Petroleum Products’ Pricing – early days.

randall-schmidt
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Pricing and Investments in Oil & Gas sector

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  1. Pricing and Investments in Oil & Gas sector

  2. Petroleum Products’ Pricing – early days • Historically, oil prices in India were controlled by Government through cross subsidy & pool operation. Oil companies were fully compensated based on a cost-plus formula. The mechanism was called Administered Pricing Mechanism (APM) • Government notified Phased Dismantling of Administered Pricing Mechanism (APM) in 1997 which commenced in 1998 & whereby all price controls were to go by March, 2002 . • For socio-economic reasons, prices of only PDS Kerosene & Domestic LPG were to continue to be administered and the same to be funded through the Consolidated Fund of India. • Deregulation did start in accordance with time-table. Transport fuels also had an initial brush with Deregulation but could not be sustained due to increasing international prices leading to higher pump prices. • By Apr’02, except for the ‘Sensitive Products’ namely Gasoline, Gasoil, Kero & LPG, all other petroleum products were fully deregulated. • 2

  3. Petroleum Products’ Pricing – the difficult years • From 2002 till recently, …… • International Oil prices have been on a steep rise • Selling prices of ‘Sensitive Products’ have remained under Government Control to protect domestic consumers from volatility & runaway increase in-line with international prices. • In contrast, Cost-price to Oil Marketing Companies (Refinery Transfer Price) has been linked to international prices & is based on import-parity principle. • Due to this contradiction, Under-recoveries of Oil Marketing Companies (OMCs) have also been increasing steadily. • Government of India have compensated OMCs from time-to-time during last few years through various mechanisms : • Sharing of subsidy burden by Upstream Companies/ Stand-alone Refiners • Issue of Oil Bonds • Budgetary Support/ Cash Compensation • 3

  4. Pricing in Oil Sector- Kirit Parikh Report • Main Recommendations: • Level Playing field and Competition • Petrol- Free both at refinery gate and retail level • Diesel- Free both at refinery gate and retail level • Additional Excise Duty on Diesel cars • Effective Distribution system for PDS kerosene & • Domestic LPG • Reduction in Kerosene allocation • PDS kerosene price increase • Domestic LPG price increase

  5. Pricing in Oil Sector- Kirit Parikh Report • Under-realization: • Under-realization calculation based on IPP (existing method) • Under-realization on petrol/diesel nil –free price • Financing under-realization- SKO(PDS)/LPG(Dom): • Reduction in PDS Kerosene allocation • PDS kerosene price increase • Domestic LPG price increase • Mopping up portion from ONGC/OIL • Cash subsidy from budget • OMCs should be compensated fully for under-realisation

  6. Petroleum Products’ Pricing – Recent developments • June, 2010 has seen major Government initiatives on Pricing of Sensitive Petroleum Products …… • Pricing of Gasoline has been decontrolled • Pricing of Gasoil shall also be market-determined in a phased manner. To start with, Retail price has been increased by Rs 2/litre to bring it closer to market-level. • Kerosene Retail prices, that had not been changed since 2002, have been increased 33% by Rs 3/litre. • LPG Retail prices have been increased 12% by Rs 35/ cylinder • All the above measures shall result in increased monthly cash-flows of around Rs 1000 Cr for IOCL. This will boost liquidity & lower need for borrowings. • 6

  7. Oil Pricing Methodology

  8. Administered Pricing Mechanism: Characteristics Administered Pricing Mechanism Fixed parameters Cost Plus Rare revisions Averaging effect Assured returns Supplier- Customer linkages

  9. De-regulatedPricing Mechanism: Characteristics De-regulated Pricing Mechanism Market - Determined Flexible parameters Frequent revisions Accent on Logistic efficiency No Assured returns Competition

  10. De-regulated Pricing Mechanism : Options Import Parity De-regulated Pricing Mechanism Cost-Based Competition- Based Government- Influenced

  11. Steps in Pricing…… • Refinery Transfer Price (RTP) • Ex-Storage Point Price (ESPP) • Selling Price/ Retail Selling Price (RSP)

  12. Import Parity Pricing Principle(for De-regulated Products) Landed Cost RTP Ex-Storage Point Price Ocean Loss Wharfage Customs Duty Marketing Margins Ocean freight Insurance Marketing Cost DLAF FOB, Premium Landed Cost (RTP)

  13. Trade Parity Pricing Principle (for MS & Diesel) Export Parity(20%) Advance License benefit Actual ESPP fixed by Govt is much lower than Desired ESPP FOB, Premium IPP (80%) Desired Ex-Storage Point Price Ocean Loss Wharfage Stock Loss Working Capital Customs Duty Net wt. Avg Frt from Port to locn. Ocean freight Insurance Marketing Cost Margins FOB, Premium 80% of IPP +20% of EPP Note : MS has been decontrolled wef 26.06.10

  14. Selling Price for Customer (Bulk Products) Components are …… • Ex-Storage Point price (ESPP) • State Specific cost (based on indirect and Irrecoverable State taxes) • Freight (railway freight from refineries / depots to customers) • Excise Duty • Sales Tax & levies Landed / Selling price for Customer

  15. Retail Selling Price (RSP)(Retail products) Components are …… • Ex-Storage Point price (ESPP) • State Specific cost (irrecoverable state taxes) • Transportation Charges (from Depot to market) • RPO Charges • Excise Duty • Dealer Commission • Sales Tax & levies Retail Selling Price (RSP)

  16. Cost price Principle for SKO(PDS) & LPG(Dom) Difference between Cost Price and Issue Price in March 2002 Fixed as Subsidy for 2002-03 (Thereafter, reduced to 1/3rd. Current subsidy is Rs 0.82/l for SKO & Rs 22.58/cyl for LPG) Cost Price at locations (Desired Selling Price as per IPP) Issue Price at locations (Actual Selling Price) Stock Loss Working Capital Freight from Port to locations Freight from Refinery to locations Marketing Cost Margins Landed Cost at ports (RTP) Ex-Storage Point Price at Refinery fixed by Govt

  17. Trends in International Prices

  18. Crude :Upward Trend of FOB Prices - $ PER BBL Average FOBs for the Previous Fortnight 2004-05 2005-06 2006-07 2007-082008-09 2009-10 Avg. FOB 38.25 55.53 67.58 66.30 83.57 69.63

  19. Petrol and Diesel :Upward Trend of FOB Prices - $ PER BBL Average FOBs for the Previous Fortnight Diesel Petrol 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Avg. FOB : MS 45.21 61.13 77.41 80.20 88.37 76.28 Avg.FOB: HSD 47.37 66.9484.18 80.60 100.60 74.69

  20. Kerosene :Upward Trend of FOB Prices Average FOBs for the Previous Month - $ PER BBL 2004-05 2005-062006-07 2007-08 2008-09 2009-10 Avg. FOB 47.98 70.04 83.51 79.50 103.24 75.36

  21. LPG :Upward Trend of FOB Prices Average FOBs for the Previous Month - $ PER MT 04-05 05-06 06-07 07-08 08-09 09-10 Avg. FOB 364 479 500 555 682 584

  22. Diesel : FOB equivalent to current(01.11.10) RSP

  23. SKO(PDS): FOB equivalent to current (01.11.10) RSP

  24. LPG: FOB equivalent to current(01.11.10) RSP

  25. Under-realisation

  26. Gross Under-realisation (In Rs. Crore) Projected Under-recovery for IOC for 2010-11 = Rs. 36,500 Crores (approx)

  27. Estimated Under-realisation of IOC:2010-11 Rs. Crores Total Rs. 36,500 Crores

  28. Impact Impact of Under realization: • On Profit • On Borrowings • On interest • On liquidity • On Investments • Physical V/s Financial performance mismatch • On market capitalization

  29. Capital Investment - Needs • Capital Investment required for- • Growth of Organization • Updation of Technology • Removal of operational bottlenecks • Improvement in efficiency & productivity • Enhancement of capacities • Fulfillment of social objectives (Generally include Expansion, Acquisition, Modernization and Replacement)

  30. Government initiative • Policies of the government - further boost to foreign investment in this industry • 100% FDI is allowed in private refineries via the automatic route and up to 49% in government-owned ones. • 100% FDI is also granted in cases of petroleum products, gas pipelines, exploration, and marketing or retail via the automatic route. • With NELP (New Exploration Licensing Policy) it has helped encourage further explorations for oil and gas reserves in India.

  31. Investment in Oil Sector- FDI Norms 31

  32. Investment in Oil Sector- FDI Norms • 100% FDI subject to- • The existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of oil and the discovered fields of national oil companies

  33. Capital Investment • “There need to be changes in petroleum and gas pricing. If we can get international pricing of gas, then we would be happy to invest in India,” said Peter Voser, CEO, Royal Dutch Shell.

  34. Thank you • IndianOil

  35. RSPs of MS, HSD, SKO & LPG in Neighbouring Countries Prices at India(Delhi) are as on 26.6.10, prices for other countries taken as on 1.6.10

  36. Diesel: Desired Vs Actual RSP at Delhi (Rs/Litre) Desired RSP Actual RSP

  37. SKO(PDS): Desired Vs Actual RSP at Delhi (Rs/Litre) Desired RSP (Net of Subsidy of Rs 0.82/Ltr) Actual RSP

  38. LPG(D):Desired Vs Actual RSP at Delhi (Rs/Cyl) Desired RSP (Net of Subsidy of Rs.22.58/Cyl 316.06 161.40 162.64 Actual RSP 127.90

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