State-owned fuel retailers buy diesel from private refiners as their own production is insufficient to meet domestic demand.
This purchase is done at trade parity price (TPP) which is 80:20 ratio of import parity price (actual import cost) and export parity price (actual price realised on exports).
The Comptroller and Auditor General of India (CAG) in a report tabled in Parliament, said private refiners export balance petroleum products they produce at prices comparable to EPP/free-on-board (FOB), which are lower than TPP/import parity price (IPP).
"Procurement at TPP/IPP affords an undue benefit to private refiners (RIL and Essar Oil), which was estimated at Rs 667 crore on diesel in only one year ie 2011-12," it said.
The same principal is used to buy fuel from standalone refineries like MRPL. "The benefit to stand alone PSU refineries on the same count was Rs 1,428 crore during 2011-12," it said.
As an illustration, CAG said TPP of diesel during 2011-12 at Jamnagar in Gujarat, where the private refineries are located, was Rs 40,031 per kilolitre and average EPP of diesel at the same location was Rs 38,625 per kl.
"Actual export realisation of RIL on diesel during 2011-12 was only Rs 38,823 per kl, slightly higher than the average EPP. Thus, procuring products from private and standalone refineries at TPP/IPP affords an undue benefit to the former," it said.
CAG said Mangalore Refinery (MRPL) benefited Rs 601 crore, Chennai Petroleum (CPCL) Rs 500 crore and Numaligarh Refineries Rs 327 crore on sale of diesel to state oil marketing companies (OMCs) in 2011-2 on similar terms.
"Audit, thus, is of the opinion that there is scope for negotiation with the private refiners to rationalise the contracted sale price which would benefit OMCs," it said.
Indian Oil Corp (IOC) stated that private refineries were bearing central sales tax (CST) incidence and coastal freight for moving the product to OMC locations. If private refineries are paid EPP based price, CST and coastal freight will have to be borne by the purchasing OMC.
CAG, however, said that TPP/IPP being charged on supply of diesel/kerosene/LPG is not the rate applicable to the source source location (Jamnagar) but that of delivery location like Kochi and Haldia.
"The IPP/TPP of products at all the port locations in the country (except Kandla in Gujarat) is higher than that of Jamnagar port," it said adding even after considering CST an freight borne by private refiners, there was a benefit of Rs 667 crore on diesel to them in 2011-12.
CAG rejected Oil Ministry's contention that in case private refineries are paid EPP based price, central sales tax and coastal freight would have to be borne by OMCs. Besides, private refineries have demanded an extra one dollar per barrel to account for more stringent Euro-III and IV diesel.
The need for an an additional dollar "is not convincing as the purchase price from private refineries already includes inter alia, a quality premium for Euro III/Euro IV products. Such quality premium would also be available if the price is based on EPP instead of TPP," it said.
The auditor said continuance of protection in the pricing mechanism was intended to improve efficiencies and encourage investments in technology upgradation in PSU refineries which has not been fully achieved.
"There is a strong case for review of this mechanism in view of the limited progress in improvement of the efficiencies of refineries and consider an alternate transparent, target oriented mechanism in the case of poorly performing refineries," it said.
Public sector oil marketing companies (OMCs) incurred excess marketing cost on sale of regulated products over the admissible rate fixed by the government, CAG said.
"There is a mismatch between the actual transportation cost and the amount factored in the product pricing on account of freight. OMCs were compensated slightly higher than the actual cost," it said.