End of deemed duty on HSD: Oil refineries to face annual loss of Rs 1-3 billion ZAFAR BHUTTA

ISLAMABAD (December 24 2009): Oil refineries will face annual revenue loss of Rs 1 to 3 billion after elimination of deemed duty on High Speed Diesel (HSD) calculated at the price of last financial year 2008-09, Business Recorder has learnt. A meeting of the high-level committee on ex-refinery pricing formula on Wednesday failed to develop consensus on proposals regarding new pricing formula.

The highest FOB price of HSD was recorded in July 2008 at $176.14 per barrel in international (Arab Gulf) market. The committee discussed different options for new ex refinery pricing formula in a meeting. Oil refineries submitted accounts of July-June 2008-09 before the committee required to finalise the proposals. The process fee was also discussed in the meeting that could be $1-1.5 per barrel for oil refineries.

According to working regarding the impact of elimination of deemed duty on HSD, refineries will have to face a loss of Rs 1-3 billion per annum and the price of HSD will be reduced by 3.5 per litre. Refineries have claimed that due to reduction in deemed duty on HSD from 10 to 7.5 percent effective August 1, 2008, the profitability of oil refineries had substantially reduced.

National Refinery Limited (NRL) claimed a loss of Rs 157 million, PRL Rs 672 million, ARL Rs 553 million and Bosicor Rs 9.486 billion during the first quarter of current financial year. Oil refineries have requested the committee to replace the current ex-refinery formula based on deemed duty with guaranteed return formula to provide safety net to the industry. Prior to 2002, all the refineries were guaranteed a minimum of 10 percent and maximum 40 percent return on their paid-up capital.

This formula was abolished in 2002 under the deregulation policy and the new formula allowed the refineries to charge 10 percent deemed duty on HSD which was reduced to 7.5 percent on July 31, 2008 when oil prices shot up to $147 per barrel. Sources said it was noted during the meeting that the government would have to pay Rs 2-5 billion to refineries as compensation under guaranteed return formula based on price during 2008-09.Under this formula, the price of HSD would decline by Rs 3 per litre to benefit consumers.

When contacted, Secretary Petroleum Mahmood Saleem said the committee discussed different options on the new proposed formula but it had not finalised any proposal. He said the committee would hold another meeting after Muharram for deliberations on the proposals. Sources said the refineries had expressed willingness to abolish deemed duty in case the government restored the guaranteed return formula. Under this formula, the government will compensate oil refineries if their profit that remained below 40 percent.