In a two-day bilateral talks on Petroleum Supply Agreement beginning in the capital on Saturday, Nepal Oil Corporation (NOC) is proposing Indian Oil Corporation (IOC) to set prices based on export parity price (EPP), which is the price that oil companies would realize on export of fuel, instead of IPP adopted so far.[break]
IPP, according to IOC´s own definition, represents the price that includes import charges and customs duty. It is used for pricing domestic supply. EPP, on the other hand, does not account import duty. Hence, it is regarded the appropriate base for calculating price while exporting refined products.
"As Nepal is entitled for duty free supply, fuel pricing for Nepal should be based on EPP," said an official at Ministry of Commerce and Supplies (MoCS).
So far, India is refunding the duty charged on crude, calculating the total volume of fuel imported by Nepal. But as later costs included in the price buildup are calculated on the basis of price that already includes duty, the government has assessed that existing system still passes on unseen burden of Indian duty to Nepali consumers.
A high-level commission that the government formed last year to suggest reforms in country´s petroleum sector too had called the government to switch to EPP, saying that only it will free Nepalis from undue transfer of additional cost.
"If IOC responded to our request positively, it will straightaway lower Nepal´s import rates by at least Rs 1.50 per liter," the source added.
But given that existing system ensures additional returns to IOC, officials doubt the Indian supplier will take the request in positive light.
During the talks, NOC will also request the IOC to lower marketing margin, which is its profit margin, and fix it at a flat rate.
Presently, IOC has been charging marketing margin at the rate of 2.5 percent (of crude´s cost and freight charges up to the Indian port). This, it says, is just 50 percent of what oil companies charge in India.
NOC is pushing for a cut in profit margin mainly to rationalize the deal as rise in crude prices and volume of consumption in Nepal since the last agreement has significantly raised profit that IOC makes from Nepal.
"In 2007, Brent crude was price around $60 per barrel; now it is well over $124. Likewise, Nepal then used to consume just around fuel worth Rs 25 billion per annum. Now annual consumption is set to touch Rs 100 billion," said the MoCS source.
If MoCS´ calculations is anything to go by, changes in just these two factors have inflated IOC´s profit from Nepal by well around 3.5-fold over the last five years. Add to it the impact of exchange rate fluctuations.
Clearly, the existing profit margin is higher, said the source, adding that NOC will request IOC to fix the margin at a flat rate. "Flat profit margin will cushion us from fluctuations of crude prices as well as exchange rate even while assuring IOC that its profit will also remain at a set level."
Likewise, the state-owned petroleum monopolist will also seek IOC to allow it import petroleum products from other Indian suppliers as well. Though the existing agreement allows NOC to source oil from third countries, it is silent on allowing other Indian oil companies to export to Nepal. "We are pushing for this change, as we believe competition on export will greatly benefit our consumers," said the source.
During the talks, NOC will also request IOC to seek payments on fortnightly basis, changing the present practice that compels it to make payments in four installments in a month. "This change will ease us in fund management," said the source.
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