The oil ministry has proposed to link the domestic price of crude oil with the international price in a phased manner over a five-year period.

During the transition period, the domestic crude prices are proposed at 75 per cent, 77.5 per cent, 80 per cent and 82.5 per cent of free on board (FOB) price in the four years.

According to the commission, this will pose problems for national oil companies as the price of their products will be less than the current price being paid to them under the APM for the first three years.

The commission has told the government that the existing APM format will adversely affect the finances of the oil companies. In turn, exploration activities of these companies will suffer for lack of funds, it said.

Pointing out flaws on retention margin for the refineries as brought out in the APM schedule, the commission said this needed a re-look. For example, the commission pointed out, ONGC and the Oil India Ltd (OIL) are producing large quantities of liquefied petroleum gas (LPG) (45 per cent of the total LPG produced in the country), NGL and C2/C3.

LPG and NGL are being passed on to the companies at less than one-third of the international price, while C2/C3 is transferred to IPCL at less than half the international price, the commission said.

The commission further said abolition of the system of retention pricing for refineries and introduction of adjusted import parity prices during the transition period will lead to different refinery margins. Margins at present vary from $2.94 per barrel for MRPL to as high as $7.27 per barrel for NRL. The rationale of such large variation needs to be looked into, the commission said.

The need for equalisation of product prices, both for the imported and domestic ones, has also been emphasised by the commission. After the decanalisation of products like furnace oil, LSHS, Naphtha and kerosene, the industries can directly import these products under the actual user licence without paying any sales tax. At the same time, however, products available from domestic refineries will attract excise and sales tax. The commission pleaded that equalisation of product prices was necessary to make both sourcing options competitive.

Significantly, even the finance ministry has found lacunae in the APM dismantling schedule. It has told the union cabinet, currently seized of the APM dismantling schedule, that the sequencing of reforms in the oil sector needed to be re-drafted so that the exact consequences for government policy and action are brought out clearly.

Differing with the oil ministry, the finance ministry has told the cabinet that the terminal year duty rates on crude oil and liquefied natural gas should be 5 per cent and not zero per cent as suggested by the oil ministry.