Refineries urge government to revive guaranteed return formula

Oil refineries have requested the government to replace the current ex-refinery formula based on deemed duty with guaranteed return formula to provide "safety net" to the industry, Business Recorder reliably learnt here on Wednesday. The proposal has been submitted to a high level committee that would present its report to the Supreme Court on December 24.
Prior to 2002, all the refineries were guaranteed a minimum of 10 percent and maximum of 40 percent return on their paid-up capital. This guaranteed return formula was abolished in 2002 under the deregulation policy. The new formula allowed the refineries 10 percent deemed duty on HSD, which was reduced to 7.5 percent on July 31, 2008 when oil prices shot up to 147 dollars per barrel.
"Oil refineries have also submitted two other proposals that include processing fee and enhancement in deemed duty on HSD from existing 7.5 to 10 percent," sources said, adding that processing fee may range from 2-5 dollars per barrel in Pakistan. They argued that oil refineries were in favour of abolishing deemed duty if the government restored the guaranteed return formula.
Under this formula, the government will compensate oil refineries if their profit remained below 40 percent. "The high level committee held its first meeting during the last month and now it was expected to meet on December 17, to finalise the proposals for new ex-refinery formula for oil industry that would be submitted before the Supreme Court," said the sources.
The refining industry has also placed a request before the committee to review the oil prices on a fortnightly basis instead of monthly basis to secure them from margin losses due to fluctuation in global oil prices. The average price of the past month is taken to calculate the oil price in the country and oil refineries argue that fluctuation in price of crude oil in the international market has put oil refineries in negative gross refinery margin (GRM).
The fortnightly price fixation system was changed to monthly basis effective from February 1, 2009. Market sources said that refineries had suffered huge losses during the 2008-09 financial year due to sharp decline in global oil prices and almost negligible guaranteed return (GR) for the refineries under the existing scenario. They pointed out that the rupee dollar parity loss, reduction in global oil prices and circular debt had had a major impact on the profitability.
The total liabilities of Pakistan State Oil (PSO) on all accounts stood at Rs 83.406 billion on Wednesday and out of it, the PSO was to pay Rs 55.429 billion to the oil refineries. The PSO payable to local refineries is as follows: Parco: Rs 22.654 billion; PRL: Rs 9.46 billion; NRL: Rs 8.521 billion; ARL: Rs 10.643 billion; and Bosicor: Rs 3.827 billion.
PRL General Manager, Supply and Planning, Aftab Hussain told Business Recorder that due to circular debt, oil refineries were facing problems associated with continuing operations. He noted that refineries were the strategic assets of the country and the whole system of fuel supply might be disturbed if refineries shut operations due to losses in the current scenario. He urged the government to announce a bailout package for the industry to enable it to continue operations.