Indian Oil Refinery Scenario

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Energy is an important accelerator for growth of economy and at present oil and natural gas is the main source of energy India has limited oil and natural gas so it is dependent on Arbian and African Countries for supply of the energy Indian industry is at present intransformation period and is growing at around 14% per annum which is not sufficient to meet the increasing requirement of energy. India has 18 refineries -- 17 in the public sector and one in the private, with an installed capacity of 127.37 mmtpa. During balance period of the 10th Plan, it is estimated that another 26.33 mmtpa capacity would be added, raising it to 153.7 mmtpa in total. It includes HPCL Mumbai: 2.4, HPCL Visakh: 0.83, BPCL Mumbai: 5.1, IOCL Panipat: 6.0 and Essar Oil Jamnagar: 12.0. The information was disclosed in a recent meeting of the Consultative Committee of the Members of Parliament for the ministry of petroleum & natural gas. India largely imports the sour variety. The overall basket is much cheaper than Brent. Environmental standards in India permit higher sulphur content in petrol and diesel. The average price of Brent per barrel in October was $50, of Dubai crude was $38. Approximately 72 million barrels per day. (7.33 barrels make one tonne.) For petro products manufactured by them, oil refineries in India are paid the ‘import parity price’, the international price plus the insurance and freight cost plus the customs duty. Thus, higher the customs duty, higher will be the gross refining margin. If the customs duty is cut, say, to 10 per cent, the domestic company would reduce its price from 15 per cent above the landed cost to 10 per cent above the import parity price. In case it does not do so, the customer, that is the marketing company, will import the product. India does not import petrol, but a cut in customs duty on petrol reduces the domestic price of petrol. Higher duties on products are imposed to encourage the growth of the refining industry. In this case, the intention is to encourage the domestic refining industry, by ‘‘protecting’’ it. Today crude has a customs duty of 10 per cent, but the customs duty on petro products is 15 per cent. The value addition in the refinery business is around 10 per cent; the duty differential of 5 per cent means that the ERP is very roughly 50 per cent. When the customs duty was 20 per cent, before the recent cuts, the effective rate of protection was even higher. Cutting duties only on crude oil will not reduce the domestic price of petroleum products. It will only increase the profit margin of domestic refineries. The first step should be to eliminate rate dispersion by bringing down the duties on petro products. When the customs duty on crude oil and petroleum products is equal, then this anomalous profitability of Indian refineries would be removed. Duties on oil and petro products still involves penalising Indian consumers owing to the presence of tariffs. Hence, for the consumer, the best thing is zero customs duties. In this case, Indian refineries would have to compete with international refineries. Refineries in India are already major exporters of petro products. This shows that they already have the engineering capability to compete with the best refineries of the world. However, if after decades of protection, refineries in India are still not efficient, there is no reason why consumers should bear the burden of their inefficiency. Nearly 50 per cent of the price of petrol that we pay at the petrol pump goes to the Government as excise and sales tax. For diesel, nearly one-third goes as tax. The discrepancy is because the excise on petrol is 63 per cent of import parity price (23 per cent + Rs 7.50 per litre) and on diesel is 16 per cent (14 per cent + Rs 1.50 per litre). No. The Government will not lose any customs revenue as India does not import petrol or diesel. The custom duties unfairly protects the refinery and penalises the Indian consumer, who has to pay prices higher...
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