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Pulling up the Government, the CAG in its report on Pricing Mechanism of Major Petroluem Products, has observed that the Petroleum Ministry buys petrol, LPG and diesel from private refiners at high prices, thus putting pressure on the margins of State-owned oil marketing companies (OMCs) like Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp. Its main contention was that whether by doing so, private refiners were being provided undue financial benefits.

Highly placed sources told The Pioneer that the national auditor in the report (which is a performance audit of the pricing mechanism of these essential products), that is to be laid in Parliament on Friday (July 19), is learnt to have questioned the Government’s logic behind paying import parity price (a substantially high price paid for purchasing petrol, diesel and LPG, based on international rates as India imports them) for these products. The CAG performance audit covers the period between 2007-08 and 2011-12.

OMCs sell these products much below market price to the common man and therefore have to bear a huge subsidy burden. While Government has its own refineries from where petrol and diesel as well as LPG is distributed across the country, at the same time in order to meet shortfalls in supplies, these state-owned entities buy small portions of petrol, LPG and diesel from private refiners to bridge their supply gap.

The CAG is learnt to have observed in the report that OMCs pay import parity price for these purchases, which puts pressure on their margins and in turn benefits private refiners, who charge high prices for selling these essential products to them.

Further to this, the national auditor, sources said, has also looked into the fact that despite petrol prices having been deregulated in 2010, why is it that OMCs continued selling the much required product at less than the market price.

They added that CAG mainly trained its attention on the aspect as to whether the OMCs did so in order to facilitate the Government of the day to earn political brownie points, considering the fact that several assembly elections were held during the period covered by the audit report. As a result of this, the OMCs continue to suffer losses on selling petrol below market prices, which reflects significantly in their quarterly as well as annual financial results.

Meanwhile, the Petroleum Ministry on its part is said to have explained to the CAG that petrol, diesel and LPG is mostly provided by OMCs for pan India distribution through their State-owned refineries network. Only a small quantity of these products is purchased from private refiners. Also the payments made to private refiners for these purchases is at par with the payments, which are made to domestic refineries owned by the Government.

Sources privy to the development said that the Petroleum Ministry in its response to the CAG’s report, is learnt to have informed it that no undue gains were accrued to private refiners, as otherwise the other available option to bridge the supply shortfall of these products would have been of importing them from outside at much higher cost.

While the CAG has raised concerns on OMCs paying import parity prices for purchasing essential fuels from private refiners, it is interesting to note that the UPA Government had itself set up an expert group under the Chairmanship of former Planning Commission member Kirit Parikh, for suggesting a pricing methodology for diesel, LPG and kerosene.

This panel suggested in its report, that came out in October 2013, at a paradoxical situation where owing to a significant increase in India’s refining capacity has led to a reduction in dependence on imported petroleum products. At the same time though, 77 per cent of crude oil consumed in India, is imported.

In such a scenario, the Parikh panel was formed to look into the rationale by Government for continuing to fix refinery gate price (RGP) of sensitive petroleum products on Import Parity Price basis, which assumes that the product is imported.

Source-On Request