Sitaram Yechury, in his article A claim to shame (Left Hand Drive, September 25), states that "all the oil companies are reporting handsome profits, not losses". This is factually incorrect. Between 1997 and 2002, the government pursued a cost-plus administrated pricing mechanism (APM) for the petroleum sector. However, as APM was becoming unsuitable for long-term growth and the efficiency of the oil industry, the government decided to replace it with a cost-plus retention pricing mechanism of petroleum products produced by domestic refineries by import parity price (IPP). As per the recommendations of the Rangarajan Committee in 2006, this was later replaced by IPP for kerosene, given through the public distribution system (PDS), and domestic LPG and trade parity price (TPP) for petrol and diesel.
Public sector oil marketing companies (OMCs) pay TPP to refineries, both in the public and private sectors, when they buy petrol and diesel, and IPP for PDS kerosene and domestic LPG. However, since the prices of petroleum products are modulated by the government, the prices at which they are sold to consumers are not in line with IPP/TPP. This results in an under-recovery to oil companies. The difference between the required price based on TPP/IPP and the actual selling price realised (excluding taxes and dealer commissions) represents the under-recoveries of oil companies.
To ascertain whether any excessive under-recoveries were being reported by OMCs, three studies were carried out through the cost accounts branch of the finance ministry in 2007-08, 2008-09 and April-September 2010, to work out the under-recoveries based on TPP/IPP method and the actual cost plus approach. These studies revealed that while the difference between price as per the IPP/TPP method and the actual cost of production was Rs. 6,544 crore in 2007-08, (minus) Rs. 2,361 crore in 2008-09 and in April-September 2010, this figure was (minus) Rs. 524 crore.
This implies that small differences were observed in the under-recovery amount worked out under both the mechanisms. In fact, the under-recovery amount calculated under the actual cost mechanism for 2008-09 and during April-September 2010 was higher as compared to the under-recovery amount under the IPP/ TPP method.
Hence, it is incorrect to conclude, as Yechury does in his article, that OMCs are claiming more under-recovery than what is actually due to them.
Public sector OMCs like HPCL, BPCL and IOCL are incurring under-recovery on the sale of subsidised diesel, PDS kerosene and domestic LPG. Hence, indicating the profits being earned by ONGC, which is not incurring any under-recovery, is not justifiable.
Upstream oil companies like ONGC and OIL also sell crude oil to domestic refineries at international prices. The government has devised a burden-sharing mechanism whereby public sector upstream companies that had been offered oil fields on nomination in the past compensate a portion of under-recoveries incurred by OMCs. In the year 2011-12, the contribution from upstream companies was Rs. 55,000 crore.
RC Joshi is director, media and communication, ministry of petroleum and natural gas. The views expressed by the author are personal.