Competition Commission of Pakistan issues Opinion to Oil and Gas Regulatory Authority, Ministry of Petroleum to eliminate discriminatory application of Inland Freight Equalization Margin
Islamabad, August 07, 2014 (PPI-OT): The Competition Commission of Pakistan (CCP) has issued an Opinion to Oil and Gas Regulatory Authority (OGRA) and Ministry of Petroleum and Natural Resources (MPNR) to eliminate discriminatory application of Inland Freight Equalization Margin (IFEM) and create a level playing field for all refineries and oil marketing companies in crude and refined oil markets.
CCP took notice of concerns raised by an oil refinery (hereinafter “the Refinery”) in respect of benefits of IFEM denied to it by the OGRA and MPNR, which discriminates against the Refinery and results into competitive disadvantage to it vis-à-vis refineries who are receiving IFEM from OGRA.
The Commission held a public hearing in the matter at the Commission’s headquarters which was attended by the representatives of MPNR, OGRA, refineries and oil marketing companies and issued an Opinion under Section 29(c) of the Competition Act, 2010.
IFEM is the cost of inland movement incurred by (i) a refinery for transportation of crude oil from source to refinery; and (ii) by an oil marketing company for transportation of finished product from supply point to depots in the country. Purpose of IFEM is to maintain the same prices of Motor Gasoline (Petrol), High Speed Diesel Oil (Diesel), Light Diesel Oil (LDO) and Kerosene Oil across the country.
OGRA has denied the transportation cost of crude oil to the Refinery on two major grounds that two Economic Coordination Committee (ECC) decisions coexist wherein one decision has disallowed crude transportation to the Refinery whereas the other has allowed the same and MPNR did not seek approval of ECC regarding rescinding latter’s earlier decision; and the Refinery has availed certain investment incentives, therefore, it cannot be given the benefit of IFEM pool.
The Commission has noted in its opinion that which decision should prevail in the case of two conflicting decisions of a higher forum is a proposition of law that is too well settled to admit any debate. The courts have held that judgment later in date and time shall prevail.
From the documents available to the Commission, it stands clarified that an informed decision has been made at the forum of ECC while allowing the Refinery reimbursement of transportation cost from IFEM. It was observed in the opinion that investment incentives are given to allow players to enter the market/or expand their business. Investment incentives cannot be offset by denying benefits normally given to existing market players.
Further, the IFEM pool is an indirect subsidy given to residents of Pakistan by covering the transportation costs of the refineries and oil marketing companies to ensure that their products are available to consumers at a uniform price across the country. Denying access to the Refinery to the IFEM pool on the basis, that it has enjoyed investment incentives and is a private sector entity, results in distorting competition in the relevant market.
Though the ECC has allowed the Refinery reimbursement of operational cost of its Single Mooring Point, OGRA denies to reimburse the same and has taken the stance that the Refinery is saving wharfage charges as it imports crude oil through its own SPM.
Therefore, allowing the operational cost of SPM may lead to the double reimbursement to the Refinery. The Commission in its Opinion has referred to a letter issued by OGRA to the Commission whereby it states that in case of local crude, the producers supply the crude to the local refineries at the refinery gate, therefore, no freight is incurred by the refineries, however, as per the pricing mechanism approved by the Federal Government the ex-refinery price allowed to refineries include the wharfage element.
This means a refinery situated in hydrocarbon rich area and using local crude oil, does not have to pay crude oil transportation, but it is still given ex-refinery price containing wharfage element. Inclusion of wharfage element in ex-refinery price and operational cost of SPM are two different matters. Hence, reimbursement of operational cost of SPM is justified on the same principle by which transportation cost is reimbursed to other refineries from the IFEM pool.
The Refinery also raised the concern that has not been declared as supply source and therefore, transportation cost incurred by oil marketing companies is not reimbursed from IFEM. This makes oil marketing companies shy of transporting the oil from the Refinery.
During the course of the hearing the only reason to oppose declaring the Refinery as supply source given by the MPNR was that giving this status is subject to start of production of a refinery and the second unit of Refinery has not yet started production. CCP observed in its Opinion that this matter can be resolved on satisfactory inspection of the Refinery.
Discriminatory access to the IFEM pool and denying the status of “supply source” distorts the market conditions for the Refinery and puts it at a competitive disadvantage vis-à-vis its competitors, thereby making it difficult for it to compete in the market. Further, such unequal treatment given to an undertaking discourages new investment and creates barrier to entry in the oil market. Therefore, it was recommended in the Opinion that the Refinery be given:
(i) the benefit of IFEM in terms of transportation cost of crude oil;
(ii) the benefit of IFEM in terms of operational cost of SPM; and
(iii) the status of “supply source”.
For more information, contact:
Director (Media and Communications)
Competition Commission of Pakistan (CCP)
7th Floor South, ISE Towers,
55-B, Jinnah Avenue, Islamabad, Pakistan
Tel: +92-51-9100260-3, +92-51-9100256
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