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Pricing Structure of Petroleum Products
The project has been mentored by Mr. Lokesh Chabbra, Head Finace, Delhi and guided by Mr. Prasun Garg, Manager Finance Delhi.

6/16/2011 HPCL Gautam Jain

DECLARATION

It is hereby declared that, this project is being submitted as a partial fulfillment of the Post-Graduate Program in Masters of Business Administration (Full Time) under Faculty of Management Studies, University of Delhi & has been exclusively designed and prepared by me. It has not been submitted to any other institute or organization except Hindustan Petroleum Corporation of India, New Delhi. It has also not been published elsewhere.

Gautam Jain FMS, Delhi

ACKNOWLEDGEMENT
Sometimes words fall short to show gratitude, the same happened with me during this project. The immense help and support received from HPCL overwhelmed me during the project.

It was a great opportunity for me to work with HPCL, pioneers in the field of Oil and Gas. I am extremely grateful to the entire team of HPCL at Scope Minar, New Delhi who have shared their expertise and knowledge with me and without whom the completion of this project would have been virtually impossible. I would like to express my deepest gratitude and sincere thanks to all those who have guided, encouraged or supported me in one way or another throughout the whole course of my project. I express my sincere thanks to my guide, Mr. Prasun Garg, Manager Finance, for imparting their knowledge to me, and for his continuous and conscientious guidance & attention. I would like to thank Mr. Lokesh Chabbra, Head Finance, Northern region who gave me an opportunity to become a part of this important and interesting project.

In the end, a sincere thanks to everyone else professionally involved in my internship. I believe my eight weeks tenure at HPCL was a very vivid experience that gave me a feel of the corporate culture.

Contents
Contents........................................................................................................................ 5 RESEARCH METHODOLOGY:..........................................................................................6 PRIMARY OBJECTIVES:................................................................................................ 6 SCOPE OF THE STUDY:................................................................................................7 DATA COLLECTION:.....................................................................................................7 LIMITATIONS:.............................................................................................................. 7 INTRODUCTION TO GLOBAL OIL AND GAS SECTOR.......................................................8 ENERGY SOURCES.........................................................................................................8 OIL & NATURAL GAS AS AN ENERGY SOURCE................................................................9 Role of Oil & Gas in India's Energy Mix:....................................................................11 COMPANY OVERVIEW...................................................................................................14 MISSION AND VISION OF HPCL..................................................................................15 PERFORMANCE PROFILE OF HPCL.............................................................................16 Products & Services..................................................................................................17 JOINT VENTURES OF HPCL........................................................................................18 REFINERIES OF HPCL................................................................................................19 NEW PROJECTS.........................................................................................................19 Corporate Social Responsibility................................................................................22 INDIAN PETROLEUM SECTOR.......................................................................................27 MAJOR PLAYERS IN MARKET .....................................................................................29 MAJOR UPSTREAM PLAYERS .....................................................................................29 KEY PLAYERS IN THE INDIAN OIL AND GAS SECTOR...................................................30 COMPANY OVERVIEW...................................................................................................34 PERFORMANCE PROFILE OF HPCL................................................................................35 REFINERIES OF HPCL................................................................................................38 CAPACITY OF REFINERIES.........................................................................................39

.................46 Historical Perspective.................49 Primary Pricing Point....................................................................... 57 RESEARCH METHODOLOGY: PRIMARY OBJECTIVES:  To understand the current pricing structure of petroleum products......................................54 PETROL .............................NEW PROJECTS......................... 50 Import Parity System..........46 Administered Price Mechanism......... ......................41 Evolution of Pricing in Petroleum Industry..................  To study and understand the evolution of the petroleum products over the period of time....................................................................................................................................................................................................................................47 Administered Pricing Policy for Petroleum products..............................54 RECOMMENDATIONS:.........................................................................................................................................51 A VIABLE AND SUSTAINABLE SYSTEM OF PRICING OF PETROLEUM PRODUCTS............39 Corporate Social Responsibility...............................................................................................................................

Time was not sufficient enough to assess all processes and policies of an organization of the stature of HPCL. If needed schedule/questionnaires would be devised to get the information on all the relevant areas of the study such as receivable management. management of cash etc.  Inadequacy of required data is another constraint. Secondary Data: The secondary sources comprise Annual Reports of the firm. Also I have referred some websites. the list of which is given in the bibliography. other journals and periodicals. LIMITATIONS:  Time is definitely the main constraint. . DATA COLLECTION: Primary Data: Primary data was collected through direct interaction with the company’s finance and accounts department. inventory management.SCOPE OF THE STUDY: .

The concept of peak oil shows that we have used about half of the available petroleum resources.INTRODUCTION TO GLOBAL OIL AND GAS SECTOR ENERGY SOURCES Fossil Fuels: Fossil fuels such as Oil. and predicts a decrease of production. Nuclear Power: Resources and technology do not constrain the capacity of nuclear power to contribute to meeting the energy demand for the 21st . Political considerations over the security of supplies. However these resources are limited in nature and significant uncertainty exists regarding their reserves. Some countries are taking action as a result of the Kyoto Protocol. environmental concerns related to global warming and sustainability will move the world's energy consumption away from fossil fuels. A government led move away from fossil fuels would most likely create economic pressure through carbon emissions trading and green taxation. and further steps in this direction are proposed. Coal and Gas continue to dominate the world energy scenario.

with much improved . Renewable Energy Sources: These include energy derived from Solar. Wind. oil and natural gas has been known as a very useful substance. and the occasional house. OIL & NATURAL GAS AS AN ENERGY SOURCE For hundreds of years. political and environmental concerns about nuclear safety and radioactive waste do constraint it. Geothermal.century. Biomass sources. The Chinese discovered a very long time ago that the energy in oil and natural gas could be harnessed. technologies to harness these sources are only now being adapted and are yet to reach the efficiency and effectiveness achieved by conventional fuel engines and cells. Wave and Tidal. Hydro. However. However. In the early days of the oil and natural gas industry. the oil and gas was mainly used to light Figure 2 Source: EIA Statistics streetlamps. and used to heat water. However.

the oil and natural gas is refined to remove impurities like water. Once brought from underground. . in your home. and even in the transportation sector! While the uses described here are not exhaustive. oil and natural gas is being used in ways never thought possible. Natural gas is used across all sectors. commercially. And no doubt. in industry. new uses are being discovered all the time. other gases. There are so many different applications for this fossil fuel that it is hard to provide an exhaustive list of everything it is used for. The industrial sector accounts for the greatest proportion of natural gas use in India. Oil and natural gas has many applications. with the residential sector consuming the second greatest quantity of natural gas. in varying amounts. they may help to show just how many things oil and natural gas can do.distribution channels and technological advancements. sand and other compounds.

this . Taken with natural gas.GLOBAL ENERGY SCENARIO PRIMARY ENERGY RESOURCES IN INDIA (%) Role of Oil & Gas in India's Energy Mix: The importance of oil in India can be gauged from the fact that it accounts for 36 percent of the Primary Energy Mix in India.

ESTIMATED FUEL MIX BY 2020 (%) (Fig 3) MARKET SEGMENTATION . once again indicating the potential for rapid growth. INDIA . However.percentage rises to 45 percent. It may be noted in this context. given that coal is a far more polluting fossil fuel as compared to natural gas. the proportion of natural gas is approximately one-third that of the world average. that a heavy reliance on coal in India is not optimal.

.60% 11.90% 15.70% 11.50% BP plc C ron T hev exaco C orporation O ther 15.30% MARKET SHARE M arket Share R oyal D utch Shell plc ExxonM obil C orp.4 % 1 0 6 .S g en tio I e m ta n 6 0 .10% 45.0 % 6 0 .30% 8.00% Europe United States Rest of the World Asia-Pacific 37.4 % 3 0 .0 % 3 0 Segm entation II 6.60% .1 % R fin g a d m rke g e in n a tin E lo tio a d p d ctio xp ra n n ro u n C e ica h m ls G s a dp w r a n o e O e th r 2 . 48.

a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA. HPCL holds an equity stake of 16.COMPANY OVERVIEW HPCL is a Fortune 500 company.3 MMTPA.14. . o HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards. In addition. one in Mumbai (West Coast) of 6.95% in Mangalore Refinery & Petrochemicals Limited. HPCL is constructing a refinery at Bhatinda. with an annual turnover of Rs.599 Crores and sales/income from operations of Rs 1. HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties.08. Ltd.889 Crores (US$ 25. as a Joint venture with Mittal Energy Investments Pte. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production. in the state of Punjab.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the other in Vishakhapatnam.306 Millions) during FY 2009-10. with a capacity of 335 TMT. 1. having about 20% Marketing share in India and a strong market infrastructure. (East Coast) with a capacity of8.

caring for environment protection and cultural heritage. caring for customers and employees. The Company will be a model of excellence in meeting social commitment. quality and profitability." VISION To be a World Class Energy Company known for caring and delighting the customers with high quality products and innovative services across domestic and international markets with aggressive growth and delivering superior financial performance. Lube and LPG Distributorships.5 MMTPA in 1984/85 to 14. Pipeline networks.428 Crores in FY 2008-09. over the years. Aviation Service Stations. On the financial front. Focusing on enhancement of productivity. environment. the turnover grew from Rs. Inland Relay Depots & Retail Outlets.8 MMTPA presently. LPG Bottling Plants. MISSION AND VISION OF HPCL MISSION "HPCL. refining and marketing. along with its joint ventures. will be a fully integrated company in the Hydrocarbons sector of exploration and production.o HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional Offices facilitated by a Supply & Distribution infrastructure comprising Terminals. health and safety norms and in employee welfare and relations . HPCL. 2687 Crores in 1984-85 to an impressive Rs 1. The refining capacity steadily increased from 5. 16. has moved from strength to strength on all fronts. It will also attain scale dimensions by diversifying into other energy related Fields and by taking up transnational operations.

67 IN 3.88 .63 4.35 TAX ON DISTRIBUTED 67.988.53 SOURCE: 58 ANNUAL REPORT OF HPCL o WHAT CORPORATION OWES 2009-2010 GROSS FIXED ASSETS DEPRECIATION NET FIXED ASSETS CAPITAL WORK PROGRESS 24.28 289.37 9.61 differed tax) PROVISION FOR FBT NET PROFIT DIVIDEND 0.337.91) 11.23 175.49 PROFIT RETAINED EARNINGS 827.193.887.301.88 (131.681.888.21 690.37 406.920.26 1.38 405.164.PERFORMANCE PROFILE OF HPCL o FINANCIAL 2009-2010 SALES GROSS PROFIT DEPREICIATION INTEREST 114.75 2005-2006 76.80 14.40 903.40 2.85 7.70 15.25 6.141.05 1.479.18 1.55 TAX (including 823.151.306.363.59 2005-2006 13.63 101.

37 (2009-2010) so this shows that there is a 220.055.399.57 SOURCE: 58 ANNUAL REPORT OF HPCL OTHERS 8. 1.37 32.94 8.39 NET ASSETS DEFFERD LIABILITY TOTAL CURRENT 4.735.888.151.735.44) 15.63 (2005-2006) to Rs.74 (2005-2006) to Rs. Products & Services .302. 1.97 (20092010).INVESTMENTS : JVC 2.74 338.557.97 339.57 2005-2006 8.71 (0.83 15.557.76 3.96 21.623.34 This data shows that overall sales of the company are increased from Rs.807.763.83 825.80 6.83 TAX (1.26 crores (2005-2006) to Rs.218. 114.396. 4.086.663. the gross profit of the company increased from Rs.18 (2009-2010) and the overall net profit of the company is increased from Rs.860.88 3.384.09 (1. 76.193.21 crores (2005-2006) to Rs.301. 11.97) 32.8% of increase in net profit but the overall net worth of the company is increased from Rs.201. 405.34 2009-2010 NET WORTH SHARE CAPITAL SHARE FORFEITURE RESERVES BORROWINGS TOTAL 11. 8.70) 11.920.63 (2009-2010).399.860.

HPCL has ventured in Upstream activities (Exploration and Production) and piped gas distribution in major cities 1 2 3 4 5 6 7 8 HPCL-Mittal Energy Ltd. Ltd.HP LUBES Retail Exploration & Production Joint Ventures Alternate Energy JOINT VENTURES OF HPCL In an effort to fulfill its vision and achieve its objectives. ( SALPG) Bhagyanagar Gas Limited (BGL) Aavantika Gas Limited Petronet India Limited (PIL) Petronet MHB Limited (PMHBL) . and augment downstream businesses. Accordingly. (HMEL) Hindustan Colas (HINCOL) Prize Petroleum Company Limited South Asia LPG Co Pvt. Opportunities are also being explored to access new revenue streams.• • • • • • • • • • Refineries Aviation Bulk Fuels & Specialities International trade LPG . HPCL has formulated plans for expansion.HP GAS Lubes . diversification and internal development Crude Refining and Marketing of finished Petroleum products is the core area of the Corporation.

and Euro III & Euro IV works are in progress . kerosene. Value-added products from crude petroleum like petrol.5 million metric tons per annum (MMTPA) capacity 2 VISAKH REFINERY : 8. the rich resources of crude petroleum of nature would remain latent. CAPACITY OF REFINERIES 1 MUMBAI REFINERY : 6.9 Mangalore Refineries and Petrochemicals Limited (MRPL) 10CREDA-HPCL Biofuel Limited (CHBL) 11Sushrut Hospital and Research Centre REFINERIES OF HPCL Without refining. diesel. environment and safety. Numerous awards have been bestowed on both the refineries in recognition of the efforts in the field of energy conservation. The refineries have been benchmarked by an international agency for various performance parameters. liquefied petroleum gas.3 million metric tons per annum (MMTPA) capacity NEW PROJECTS . Projects have been implemented and facilities upgraded to produce green fuels like unleaded petrol and low sulphur diesel. HPCL refineries upgrade the crude petroleum into many value-added products and over 300 grades of lubricants. The Lubricating Oils Refinery set up at Mumbai is largest lube refinery in India. specialties and greases. The offsite product handling facilities of refineries at Mumbai and Vishakhapatnam has been automated. naphtha and many more products would not be available for growth and development of a nation. It produces superior quality lube base oils.

MS and HSD.4 MMTPA capacity. which will increase the FCCU processing capacity from the existing level of 1 MMTPA to 2. the refinery is installing a new FCCU of 1. Setting up of this plant is expected to enhance the recovery of valuable oil from the heavier fraction of the crude (VTB). the project also enabled to upgrade Naphtha to Gasoline which is a value added product. Apart from meeting MS quality stipulations. Similarly Visakh Refinery has also planned to implement the Delayed Coker Unit (DCU) Projects for bottom up gradation. which fall under API Gr-I category. New FCCU project at Mumbai Refinery: In order to enhance the production of value added products like LPG. The project is expected to be completed by the 2nd qtr of 2010-11. Bottom Up-gradation Projects: Mumbai Refinery has undertaken Feasibility Study of “Solvent Deasphlating Unit (SDA)” by using the proprietary technology “Residuum Oil Supercritical Extraction (ROSE)”. To meet the increased demand of the same LOBS quality in the domestic market including the API Gr-II/III category the capacity is being uplifted. The project will help HPCL to .Identification and implementation of projects for process improvement. The following new projects have been undertaken by Mumbai and Visakh Refineries to upgrade the facilities to meet the product demand : Facilities for Euro-III & IV grade Gasoline: Both Refineries have executed Green Fuels & Emission Control Project (GFECP) at Mumbai Refinery and Clean Fuel Project at Visakh Refinery to produce Euro-III/IV gasoline with capability to produce Euro-IV MS. LOBS Project: Mumbai refinery produces various grades of LOBS with sulphur above 300 ppm and saturates below 90%. safety and environment related concerns are ongoing processes. Environmental facilities: Environmental facilities are being upgraded in both the Refineries by installing Integrated Effluent Treatment Plants to comply with air pollution limits set forth by Pollution Control Board. performance.4 MMTPA.

1999 etc.. 4th Round ESA . The VLCCs cannot be berthed in the existing crude receiving jetties due to draught restrictions. View the Compliance Status of Environmental Clearance Stipulations for DHT VR Project. The project is expected to be completed by June 2010. The installation of SPM will reduce the freight cost and wharf age charges and thus will improve the economics of the Refinery. . viz. The Environmental Statement for the FY 2009-10 has been submitted to Andhra Pradesh Pollution Control Board (APPCB). MR/VR DHT: Both Refineries are setting up DHT projects to upgrade / produce the Euro-III / IV HSD and projects are expected to be completed mechanically by Sept 2011. The Mounded storage of LPG has proved to be safer compared to above ground storage vessels since it provides intrinsically passive and safe environment and eliminates the possibility of Boiling Liquid Expanding Vapor Explosion (BLEVE) phenomenon. Single Point Mooring (SPM) Project at Visakh Refinery: Visakh Refinery putting up SPM project to facilitate unloading of large crude parcels of the size of around 300. The Environmental Clearance for this project has been obtained.September.000 Metric Tonnes from Very Large Crude Carriers (VLCCs). This is a risk mitigation project and undertaken following the recommendations by the external safety agencies. Mumbai Refinery and Visakh Refinery has been obtained. The Environmental Statement for the financial year (FY2009-10) has also been submitted to the Andhra Pradesh Pollution Control Board (APPCB) . High Power steering Committee August. The offshore and onshore installation work of the project has been completed. The Environmental Clearance for DHT Projects for both the refineries. The approved project cost is Rs.keep its market share of LOBS intact. 1998. Modernization Project for Mounded Storage System for LPG /Propylene at Visakh Refinery: Visakh Refinery is executing the Mounded storage system for LPG and Propylene in place of existing LPG /Propylene Horton spheres. 124 Crores. View status of Compliance of Stipulated EC Conditions.

Safety of the employees and public. philosophy and training. BEYOND BUSINESS CORPORATE SOCIAL RESPONSIBILITY Promising whatever it takes to make a difference: . families and the communities in which they carry out the activities. plants. Safety Policy As an integral part of its business. essential for productivity and effectiveness of the Corporation. HPCL believes that no work or service or activity is so important or urgent that safety be overlooked or compromised. The Corporation will constantly Endeavour to achieve and maintain high standards of Safety in its operations. instill awareness in these areas. in all employees. Health Policy To provide a structured program to look after and promote the health of vital “Human Resource”. healthy and pollution free environment in and around all our refineries.Corporate Social Responsibility Environment Mission & SHE policy Mission To have safe. Environment Policy The Corporation is committed to conduct its operation in such a manner as compatible with environment and economic development of the community. facilities and other premises at all times. protection of their as well as Corporation’s assets shall be paramount. Its aim is to create an awareness and respect for the environment. stressing on every employee’s involvement in environmental improvement by ensuring healthy operating practices. including relevant laws. Corporation considers that safety is one of the important tools to enhance productivity and to reduce national losses.

amenities for the sufferers of natural disasters and environmental protection. infrastructure. planning investments in social causes methodically. A compact booklet: "Bringing Smiles (2008-09)" provides details of HPCL's various CSR activities during FY 2008-09. vocational training & employment generation. The most commendable feature of the support is that HPCL has taken innovative measures to infuse self reliance in masses to secure long lasting improvements. training in self-reliance. The funds for different CSR projects have been consistently allocated in a transparent manner. HPCL's initiatives have made notable differences in fields as diverse as education.HPCL is committed to create a positive impact on the society and contribute to socio economic development including measures for improving the quality of life of underprivileged classes of the society. HPCL has provided sustained value for the above mentioned investments all the time and has contributed to the living standards of underprivileged masses. "Bringing Smiles (2009-10)" contains details of CSR activities undertaken by HPCL during the FY-2009-10. . 2. The relevance that a company achieves by virtue of its socio-economic participation surpasses the profit and loss measurements by far. executing the various steps with utmost care and securing distinctive developments for the poor and the downtrodden masses. In this respect HPCL has proceeded in the truly corporate manner. 3. HPCL follows an allocation process based on complete evaluation and benchmark standardization. Since its inception. HPCL has tried to follow Corporate Social Responsibility in the true sense. health and hygiene. HPCL has categorized different projects of social relevance according to national and regional significance. welfare measures. HPCL has surely paved the way in the right direction with exemplary contributions. When it comes to social contribution our country never lacked goodwill among corporate citizens but competent contributors were never in good numbers as far as management and execution skills are concerned. This sense of responsibility comes from a feeling that not every achievement of the company is reflected in its balance sheets. HPCL's initiatives have created value in the following diverse ways – 1. The investment has been made according to solid result oriented plans with every detail of the prospect taken into consideration.

The Expenditure for the year 2005-06 stands at a whopping Rs. Corporate Social Responsibility Initiatives touching lives : The following CSR Initiatives have placed HPCL in a league of its own.e. vocational training for unemployed youth. This initiative has helped to identify the impacts of projects keeping national interest in mind. Economic. A Foundation has been established to take up projects of National significance. 8 crores for other CSR projects. education of rural children. healthcare facilities. assessment and appraisal by world class professionals. The corporation went beyond the parameters of the SC/ST Component Plan to extend support. Swavalamban: . Social & Environment. The fund has been arranged by virtue of a policy decision to allocate certain percentage of the net profit for each financial year to Component Plan and CSR activities and to operate the CSR policy on Triple Bottom Line principle i. 5. Budget for the CSR projects subsequently rose every year and larger portions of underprivileged masses were gradually incorporated into the schemes.18 Lakhs for undertaking various welfare activities for the benefit of SC/STs and other weaker sections of the Society under the Special Component Plan/Tribal Sub-Plan and Welfare Plan for Weaker Sections. computer training. HPCL took its first step in this direction during the year 1985-86 with a modest budget allocation of Rs. HPCL has set exemplary organizational competency in carrying out complex and demanding projects.7 crores for SCP projects and Rs.4. An "HPCL Foundation" is being set up to finance the CSR projects and also monitor implementation of distinct schemes like AIDS prevention. Later the corporation expanded the scope and allotment of such projects in manifolds to uphold its "Socially Responsible Corporate citizen" Image and to address the huge welfare expectation which the society was increasingly resting on the corporation. The implementation process is supported by adequate checks and balances including reporting. etc.

HPCL and CII have joined hands along with M/s City & Guilds to impart training to youths and change them into able professionals. The project operating partner is Organization for Socially Economic and Rural Development (OSERD). Suraksha: This is an initiative towards prevention of HIV/AIDS through training/lectures and distribution of condoms to truckers at Highway Retail Outlets. Nanhi Kali: The project is an initiative towards Supporting the Girl Child. many of them living in footpaths by providing shelter at Tuglakabad and Jahangipuri in Delhi. Navjyot: This project aims at increasing the health index of children who have been unfortunately displaced from slums. health care. are provided for them through HPCL's operating partner M/s Prayas Juvenile Aid Centre (JAC) Society. Unnati: The objective of this initiative is to provide Computer training to 3000 students at Visakhapatnam through NIIT Limited.The objective of this programme is to provide free Vocational Training to beneficiaries from low income group households. and Paderu region in Andhra Pradesh in collaboration with M/s KC Mahindra Education Trust. The project currently accommodates 3100 slum children from Bawana Resettlement Colony and imparts health care services. Schools from Mehboobnagar Dist. Navjyot India Foundation is the official partner in the project. meals. Corporation has provided Sponsorship of the quality school education of 498 renewals of Nanhi Kalis and additional 1400 Nanhi Kalis from various Govt. Education. . vocational training etc. Muskan: This project ponders into the welfare of 100 underprivileged children. clothing.

It can be said that the corporation has touched lives qualitatively acting as a corporate social ambassador. meticulously secured the input-output-outcome 3. . 2.Global Warming: Under this project. agricultural development. HPCL has always seen itself as a contributing participant in India's overall development. Goa and Mumbai through our operating partner CSRL (Centre for Social Responsibility & Leadership). Apart from directly contributing to the betterment of weaker sections of the society. rural reconstruction. HPCL has been associated with healthcare.To summarise HPCL's approach towards social welfare we have to mention the following points- 1. HPCL has balance. education. approximately 20000 school children are being educated on causes of Global Warming at Delhi. environmental protection. The corporation has stood the test of time being true to citizen's expectations. The advanced planning regarding allocation of resource and correct evaluation of performance against benchmark have represented organizational competence. water supply development etc. HPCL has underlined the social problems accurately and has taken result oriented initiatives. A Corporate approach towards development: The current projects bear the mark of a well thought of corporate mindset . The success of HPCL lies in the maintenance of social responsibilities amid profit driven and competitive business environment. 4. Strategic approach to every issue is the key to HPCL's success.

INDIAN PETROLEUM SECTOR .

OIL. CPCL. BRPL.Indian Petroleum Sector Upstream Sector Oil & Gas Exploration Downstream Sector ONGC. HPCL. NRL. ONGC. MRPL . BPCL. RIL. KRL. RIL Refining & Marketing Natural gas distribution GAIL IOC.

MAJOR PLAYERS IN MARKET MAJOR UPSTREAM PLAYERS British Gas GSPC RIL ONGC HOEC OIL Cairn .

midstream and downstream segment • PSU engaged in refining and marketing of petroleum products • 287 Have two subsidiary companies – Kochi Refineries Ltd.5 MT (16.25% of India’s refining capacity) India’s largest private sector company on all major financial parameters Profile . 41% of National refining capacity and 51% downstream pipeline capacity • Operates the largest and widest network of petrol and diesel stations in the country • 264 • Presence in Upstream. And Numaligarh Refineries Limited • Refining Capacity – 24.KEY PLAYERS IN THE INDIAN OIL AND GAS SECTOR Fortun Company e 500 Rank • India’s largest company by sales (Turnover : USD 37bn) • India’s flagship Downstream company – Along with subsidiaries accounts for 47% 105 of Petroleum market share among Public Sector Oil Companies.

• • Strategic location Nearness to the premier crude oil and gas supply market (Middle East) Geographical Proximity to the major petroleum product importers – China and Japan 2. Government policies conducive to the growth of the sector – tax holidays. Well Developed Maritime infrastructure 3. Special Economic Zones for Petroleum products 4. Availability of experienced manpower at lesser costs –Cost advantage 5. Existence of hi-tech indigenous EPC Companies – lower construction periods .• Another mega Public sector company with focus on refining and marketing 311 • • Turnover of about US$ 17 Billion Accounts for about 10% of India’s total refining capacity • 335 • India’s Flagship E & P Company Accounts for 77% of crude oil and 81% of natural gas produced in India • Venturing into downstream refining and marketing OPPORTUNITIES FOR INDIA 1.

rigs.) • Redevelopment recovery factor • Offer of CBM blocks through Competitive bidding route. acquiring stakes in these refineries • Ethanol and Biodiesel production – cultivation of Sugarcane and Jatropha • Petroleum marketing – setting up of retail outlets. • • • Natural gas hydrate programme Underground coal gasification Coal to oil conversion of existing fields to improve Midstrea m/ Downstre am • Refining – Expansion of existing capacities. new product pipelines. Large domestic market • • Anchor customer of the various petroleum products Possibility of achieving economies of scale Significant Business Opportunities for foreign players Upstrea m • NELP rounds and for Open providers acreage of system – (Opportunities services platforms. setting up of new refineries. Offshore vessels etc.6. • LNG imports .

• • • Setting up of LNG Regasification terminals. Offshore Transshipment (Single Buoy Mooring) Laying of cross country gas grid and transnational gas pipelines • City Gas Distribution including laying of CGD and CNG networks Initiatives to attract Foreign Direct Investment Exploration & Production • • • • Up to 100% FDI through automatic route Through incorporated/ unincorporated Joint ventures or directly Up to 100% FDI if set up as a private Indian company Refining • Up to 26% in case of state owned companies Marketing Product Pipelines Natural Gas/ LNG pipelines • • • • Up to 100% FDI through automatic route Up to 100% FDI through automatic route Up to 100% FDI allowed Approval required from Foreign Investment Promotion Board .

Ltd. having about 20% Marketing share in India and a strong market infrastructure.306 Millions) during FY 2009-10. Inland Relay Depots & Retail Outlets. a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA.3 MMTPA. HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties. Aviation Service Stations. o MISSION AND VISION OF HPCL MISSION . The refining capacity steadily increased from 5. one in Mumbai (West Coast) of 6. o HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards. 1.08. with an annual turnover of Rs.599 Crores and sales/income from operations of Rs 1.428 Crores in FY 2008-09. LPG Bottling Plants. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production. the turnover grew from Rs. HPCL holds an equity stake of 16. with a capacity of 335 TMT. HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional Offices facilitated by a Supply & Distribution infrastructure comprising Terminals.14. HPCL is constructing a refinery at Bhatinda. 2687 Crores in 1984-85 to an impressive Rs 1. (East Coast) with a capacity of8. On the financial front.889 Crores (US$ 25. as a Joint venture with Mittal Energy Investments Pte.8 MMTPA presently.95% in Mangalore Refinery & Petrochemicals Limited. over the years. has moved from strength to strength on all fronts. Lube and LPG Distributorships.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the other in Vishakhapatnam. in the state of Punjab. 16. Pipeline networks. HPCL.5 MMTPA in 1984/85 to 14. In addition.COMPANY OVERVIEW HPCL is a Fortune 500 company.

18 1.23 175.26 1. health and safety norms and in employee welfare and relations PERFORMANCE PROFILE OF HPCL o FINANCIAL 2009-2010 SALES GROSS PROFIT DEPREICIATION INTEREST 114.38 TAX (including 823. It will also attain scale dimensions by diversifying into other energy related Fields and by taking up transnational operations.193.920.05 .88 (131. Focusing on enhancement of productivity. along with its joint ventures.21 690. quality and profitability. caring for environment protection and cultural heritage.75 2005-2006 76.61 differed tax) PROVISION FOR FBT 0. caring for customers and employees."HPCL. environment.91) 11.63 4." VISION To be a World Class Energy Company known for caring and delighting the customers with high quality products and innovative services across domestic and international markets with aggressive growth and delivering superior financial performance.888.40 903.164. refining and marketing. The Company will be a model of excellence in meeting social commitment. will be a fully integrated company in the Hydrocarbons sector of exploration and production.151.

88 825.57 2005-2006 8.49 PROFIT RETAINED EARNINGS 827.94 8.09 (1.80 OTHERS 8.681.71 (0.363.25 6.35 405.76 3.97) 32.34 2009-2010 NET WORTH SHARE CAPITAL SHARE FORFEITURE RESERVES 11.96 .479.887.97 339.39 NET ASSETS DEFFERD LIABILITY TOTAL CURRENT 4.306.988.055.384.301.763.80 14.55 TAX ON DISTRIBUTED 67.396.218.28 289.557.70) 11.59 2.70 15.086.623.807.83 TAX (1.83 2005-2006 13.735.88 3.141.40 2.201.85 7.44) 15.53 SOURCE: 58 ANNUAL REPORT OF HPCL o WHAT CORPORATION OWES 2009-2010 GROSS FIXED ASSETS DEPRECIATION NET FIXED ASSETS CAPITAL WORK PROGRESS INVESTMENTS : JVC 24.63 101.NET PROFIT DIVIDEND 1.37 406.860.67 IN 3.399.37 9.74 338.337.

663.18 (2009-2010) and the overall net profit of the company is increased from Rs. 4.21 crores (2005-2006) to Rs. Products & Services • • • • • • • • • • Refineries Aviation Bulk Fuels & Specialities International trade LPG .860.97 (20092010).83 15.26 crores (2005-2006) to Rs.63 (2009-2010).63 (2005-2006) to Rs.735. 114.888.151.8% of increase in net profit but the overall net worth of the company is increased from Rs.920.399. 8.57 SOURCE: 58 ANNUAL REPORT OF HPCL This data shows that overall sales of the company are increased from Rs.37 (2009-2010) so this shows that there is a 220.557.74 (2005-2006) to Rs. 1.BORROWINGS TOTAL 21.HP GAS Lubes .34 6.302.193. the gross profit of the company increased from Rs. 1.37 32.HP LUBES Retail Exploration & Production Joint Ventures Alternate Energy . 405. 11.301. 76.

(HMEL) 13Hindustan Colas (HINCOL) 14Prize Petroleum Company Limited 15South Asia LPG Co Pvt. specialties and greases. The Lubricating . diversification and internal development Crude Refining and Marketing of finished Petroleum products is the core area of the Corporation. liquefied petroleum gas. and augment downstream businesses. HPCL has formulated plans for expansion. naphtha and many more products would not be available for growth and development of a nation. ( SALPG) 16Bhagyanagar Gas Limited (BGL) 17Aavantika Gas Limited 18Petronet India Limited (PIL) 19Petronet MHB Limited (PMHBL) 20Mangalore Refineries and Petrochemicals Limited (MRPL) 21CREDA-HPCL Biofuel Limited (CHBL) 22Sushrut Hospital and Research Centre REFINERIES OF HPCL Without refining. Accordingly. Value-added products from crude petroleum like petrol. the rich resources of crude petroleum of nature would remain latent. Opportunities are also being explored to access new revenue streams. diesel. kerosene. HPCL has ventured in Upstream activities (Exploration and Production) and piped gas distribution in major cities 12HPCL-Mittal Energy Ltd. HPCL refineries upgrade the crude petroleum into many value-added products and over 300 grades of lubricants.JOINT VENTURES OF HPCL In an effort to fulfill its vision and achieve its objectives. Ltd.

5 million metric tons per annum (MMTPA) capacity 4 VISAKH REFINERY : 8. Projects have been implemented and facilities upgraded to produce green fuels like unleaded petrol and low sulphur diesel. Numerous awards have been bestowed on both the refineries in recognition of the efforts in the field of energy conservation. The following new projects have been undertaken by Mumbai and Visakh Refineries to upgrade the facilities to meet the product demand : Facilities for Euro-III & IV grade Gasoline: Both Refineries have executed Green Fuels & Emission Control Project (GFECP) at Mumbai Refinery and Clean Fuel Project at Visakh Refinery to produce Euro-III/IV gasoline with capability to produce Euro-IV MS. Apart from meeting MS quality stipulations. The refineries have been benchmarked by an international agency for various performance parameters. CAPACITY OF REFINERIES 3 MUMBAI REFINERY : 6.Oils Refinery set up at Mumbai is largest lube refinery in India. It produces superior quality lube base oils. environment and safety. the project also enabled . The offsite product handling facilities of refineries at Mumbai and Vishakhapatnam has been automated. performance. safety and environment related concerns are ongoing processes. and Euro III & Euro IV works are in progress .3 million metric tons per annum (MMTPA) capacity NEW PROJECTS Identification and implementation of projects for process improvement.

Single Point Mooring (SPM) Project at Visakh Refinery: Visakh Refinery putting up SPM project to facilitate . New FCCU project at Mumbai Refinery: In order to enhance the production of value added products like LPG. which fall under API Gr-I category. The project will help HPCL to keep its market share of LOBS intact. MS and HSD. Setting up of this plant is expected to enhance the recovery of valuable oil from the heavier fraction of the crude (VTB). The project is expected to be completed by the 2nd qtr of 2010-11. Mumbai Refinery and Visakh Refinery has been obtained. the refinery is installing a new FCCU of 1. Similarly Visakh Refinery has also planned to implement the Delayed Coker Unit (DCU) Projects for bottom up gradation. which will increase the FCCU processing capacity from the existing level of 1 MMTPA to 2.4 MMTPA. LOBS Project: Mumbai refinery produces various grades of LOBS with sulphur above 300 ppm and saturates below 90%.4 MMTPA capacity. Bottom Up-gradation Projects: Mumbai Refinery has undertaken Feasibility Study of “Solvent Deasphlating Unit (SDA)” by using the proprietary technology “Residuum Oil Supercritical Extraction (ROSE)”. The Environmental Clearance for DHT Projects for both the refineries. View the Compliance Status of Environmental Clearance Stipulations for DHT VR Project. To meet the increased demand of the same LOBS quality in the domestic market including the API Gr-II/III category the capacity is being uplifted. The Environmental Statement for the FY 2009-10 has been submitted to Andhra Pradesh Pollution Control Board (APPCB).to upgrade Naphtha to Gasoline which is a value added product. Environmental facilities: Environmental facilities are being upgraded in both the Refineries by installing Integrated Effluent Treatment Plants to comply with air pollution limits set forth by Pollution Control Board. MR/VR DHT: Both Refineries are setting up DHT projects to upgrade / produce the Euro-III / IV HSD and projects are expected to be completed mechanically by Sept 2011. The project is expected to be completed by June 2010.

unloading of large crude parcels of the size of around 300.September. in all employees. The approved project cost is Rs. 1998. 124 Crores. instill awareness in these areas. View status of Compliance of Stipulated EC Conditions. This is a risk mitigation project and undertaken following the recommendations by the external safety agencies. families and the communities in which they carry out the activities.000 Metric Tonnes from Very Large Crude Carriers (VLCCs). The VLCCs cannot be berthed in the existing crude receiving jetties due to draught restrictions. The Mounded storage of LPG has proved to be safer compared to above ground storage vessels since it provides intrinsically passive and safe environment and eliminates the possibility of Boiling Liquid Expanding Vapor Explosion (BLEVE) phenomenon. plants. The Environmental Statement for the financial year (FY2009-10) has also been submitted to the Andhra Pradesh Pollution Control Board (APPCB) . facilities and other premises at all times. The offshore and onshore installation work of the project has been completed. 4th Round ESA . High Power steering Committee August. viz. Corporate Social Responsibility Environment Mission & SHE policy Mission To have safe. Environment Policy . The installation of SPM will reduce the freight cost and wharf age charges and thus will improve the economics of the Refinery. Modernization Project for Mounded Storage System for LPG /Propylene at Visakh Refinery: Visakh Refinery is executing the Mounded storage system for LPG and Propylene in place of existing LPG /Propylene Horton spheres.. The Environmental Clearance for this project has been obtained. including relevant laws. 1999 etc. healthy and pollution free environment in and around all our refineries.

Since its inception. essential for productivity and effectiveness of the Corporation. protection of their as well as Corporation’s assets shall be paramount.The Corporation is committed to conduct its operation in such a manner as compatible with environment and economic development of the community. HPCL believes that no work or service or activity is so important or urgent that safety be overlooked or compromised. stressing on every employee’s involvement in environmental improvement by ensuring healthy operating practices. Its aim is to create an awareness and respect for the environment. Corporation considers that safety is one of the important tools to enhance productivity and to reduce national losses. This sense of responsibility comes from a feeling that not every achievement of the company is reflected in its balance sheets. planning investments in social causes methodically. . philosophy and training. Safety Policy As an integral part of its business. HPCL has tried to follow Corporate Social Responsibility in the true sense. The relevance that a company achieves by virtue of its socio-economic participation surpasses the profit and loss measurements by far. Safety of the employees and public. executing the various steps with utmost care and securing distinctive developments for the poor and the downtrodden masses. The Corporation will constantly Endeavour to achieve and maintain high standards of Safety in its operations. In this respect HPCL has proceeded in the truly corporate manner. HPCL has provided sustained value for the above mentioned investments all the time and has contributed to the living standards of underprivileged masses. BEYOND BUSINESS CORPORATE SOCIAL RESPONSIBILITY Promising whatever it takes to make a difference: HPCL is committed to create a positive impact on the society and contribute to socio economic development including measures for improving the quality of life of underprivileged classes of the society. Health Policy To provide a structured program to look after and promote the health of vital “Human Resource”.

HPCL's initiatives have made notable differences in fields as diverse as education. The investment has been made according to solid result oriented plans with every detail of the prospect taken into consideration. infrastructure. amenities for the sufferers of natural disasters and environmental protection.A compact booklet: "Bringing Smiles (2008-09)" provides details of HPCL's various CSR activities during FY 2008-09. The implementation process is supported by adequate checks and balances including reporting.18 Lakhs for undertaking various welfare activities for the benefit of SC/STs and other weaker sections of the Society under the Special Component Plan/Tribal Sub-Plan and Welfare Plan for Weaker Sections. 10. The most commendable feature of the support is that HPCL has taken innovative measures to infuse self reliance in masses to secure long lasting improvements. HPCL's initiatives have created value in the following diverse ways – 6. This initiative has helped to identify the impacts of projects keeping national interest in mind. HPCL has set exemplary organizational competency in carrying out complex and demanding projects. When it comes to social contribution our country never lacked goodwill among corporate citizens but competent contributors were never in good numbers as far as management and execution skills are concerned. Later the corporation expanded the scope and allotment of such projects in . HPCL has surely paved the way in the right direction with exemplary contributions. vocational training & employment generation. 8. HPCL follows an allocation process based on complete evaluation and benchmark standardization. welfare measures. assessment and appraisal by world class professionals. 7. training in self-reliance. A Foundation has been established to take up projects of National significance. "Bringing Smiles (2009-10)" contains details of CSR activities undertaken by HPCL during the FY-2009-10. 9. The funds for different CSR projects have been consistently allocated in a transparent manner. health and hygiene. HPCL took its first step in this direction during the year 1985-86 with a modest budget allocation of Rs. HPCL has categorized different projects of social relevance according to national and regional significance.

healthcare facilities. Unnati: . computer training. The project currently accommodates 3100 slum children from Bawana Resettlement Colony and imparts health care services.e. The Expenditure for the year 2005-06 stands at a whopping Rs. Social & Environment. vocational training for unemployed youth. Navjyot: This project aims at increasing the health index of children who have been unfortunately displaced from slums. Corporate Social Responsibility Initiatives touching lives : The following CSR Initiatives have placed HPCL in a league of its own. Budget for the CSR projects subsequently rose every year and larger portions of underprivileged masses were gradually incorporated into the schemes. Swavalamban: The objective of this programme is to provide free Vocational Training to beneficiaries from low income group households.7 crores for SCP projects and Rs. An "HPCL Foundation" is being set up to finance the CSR projects and also monitor implementation of distinct schemes like AIDS prevention. The corporation went beyond the parameters of the SC/ST Component Plan to extend support. Economic. The fund has been arranged by virtue of a policy decision to allocate certain percentage of the net profit for each financial year to Component Plan and CSR activities and to operate the CSR policy on Triple Bottom Line principle i. education of rural children. 8 crores for other CSR projects. HPCL and CII have joined hands along with M/s City & Guilds to impart training to youths and change them into able professionals.manifolds to uphold its "Socially Responsible Corporate citizen" Image and to address the huge welfare expectation which the society was increasingly resting on the corporation. Navjyot India Foundation is the official partner in the project. etc.

Education. Strategic approach to every issue is the key to HPCL's success. vocational training etc. Schools from Mehboobnagar Dist. many of them living in footpaths by providing shelter at Tuglakabad and Jahangipuri in Delhi. A Corporate approach towards development: The current projects bear the mark of a well thought of corporate mindset .The objective of this initiative is to provide Computer training to 3000 students at Visakhapatnam through NIIT Limited. health care. clothing. Goa and Mumbai through our operating partner CSRL (Centre for Social Responsibility & Leadership). Corporation has provided Sponsorship of the quality school education of 498 renewals of Nanhi Kalis and additional 1400 Nanhi Kalis from various Govt.To summarise HPCL's approach towards social welfare we have to mention the following points- 5. Global Warming: Under this project. meals. approximately 20000 school children are being educated on causes of Global Warming at Delhi. . Suraksha: This is an initiative towards prevention of HIV/AIDS through training/lectures and distribution of condoms to truckers at Highway Retail Outlets. Nanhi Kali: The project is an initiative towards Supporting the Girl Child. and Paderu region in Andhra Pradesh in collaboration with M/s KC Mahindra Education Trust. Muskan: This project ponders into the welfare of 100 underprivileged children. The project operating partner is Organization for Socially Economic and Rural Development (OSERD). are provided for them through HPCL's operating partner M/s Prayas Juvenile Aid Centre (JAC) Society.

water supply development etc. education. HPCL has underlined the social problems accurately and has taken result oriented initiatives. The corporation has stood the test of time being true to citizen's expectations. Apart from directly contributing to the betterment of weaker sections of the society. Evolution of Pricing in Petroleum Industry Historical Perspective The development of petrol-retail sector in India has witnessed three distinct phases: • • Period of dominance of multinational companies Advent of public sector. environmental protection. meticulously secured the input-output-outcome 7. 8. its growth in co-existence with these transnational companies . HPCL has always seen itself as a contributing participant in India's overall development. It can be said that the corporation has touched lives qualitatively acting as a corporate social ambassador. HPCL has balance. HPCL has been associated with healthcare. agricultural development. rural reconstruction. The advanced planning regarding allocation of resource and correct evaluation of performance against benchmark have represented organizational competence. The success of HPCL lies in the maintenance of social responsibilities amid profit driven and competitive business environment.6.

A new era of planned development in consonance with national priorities under the overall direction of the government thus began in the oil sector. the marketing and retailing of petroleum products was in the hands of the private companies like Catlex. Esso. Later the government gradually exercised control through public sector companies. Shell etc. From the state of the cutthroat competition in marketing and distribution. IBP was acquired in 1970 and HPC came into existence in 1974 and BPC in 1976. IOC was formed in 1959. The assets of the oil company in terms of infrastructure facilities were now the national assets. the PSUs had to quickly adapt to the changed scenario. The second phase started with actions taken in pursuance of the Industrial Policy Resolution.economic factors encouraged it to go ahead for acquiring the assets of all multinational companies operating in the country. 1956 to promote growth of the vital petroleum sector under the state control. In the third phase. the experience gained by the government during the second phase and the socio.• Marketing by the wholly government-owned companies and the fulfillment of socio-economic objectives At the time of the independence. Eventually. Administered Price Mechanism The country has traditionally operated under an Administered Pricing Mechanism for petroleum products. the entire oil industry was truly in the government fold. In 1981. This system is based on the retention price . The important area of concern was their optimum utilization.

plus excise duties/local taxes/ dealer margins and agreed marketing margins of each of the refineries. . Upstream companies. the oil companies themselves maintained pool accounts for major products without any intervention by the government. like naphtha. In 1948. Free imports are permitted for almost all petroleum products except petrol and diesel.concept under which the oil refineries. there were no controls whatsoever on the pricing of the petroleum products. Between 1939 and 1948. oil marketing companies and the pipelines are compensated for operating costs and are assured a return of 12% post-tax on networth. Free imports are permitted for almost all petroleum products except petrol and diesel. the Government of India is moving away from the administered pricing regime to market-determined. The administered pricing pilicy of petroleum products ensures that products used by the vulnerable sections of the society. namely ONGC. an attempt was made to regulate prices through Valued Stock account procedure. a fixed level of profitability for the oil companies is ensured subject to their achieving their specified capacity utilisation. or products used as feedstocks for production of fertilizer.oil and GAIL. Under this concept. are also under retention price concept and are assured a fixed return. Gradually. tariff-based pricing. LPG and lubricants by private parties is permitted. may be sold at subsidized prices. It is contemplated that in a phased manner. all administered price products will be taken out of the administered pricing regime and the system will be replaced by a progressive tariff regime in order to provide a level playing field for new investments in a free and competitive market Up to 1939. like kerosene. Any excess realization was surrendered to the Government. Free marketing of imported kerosene. Under this procedure realization of oil companies was restricted to the import parity price of finished goods.

• Each refinery/pipeline/marketing function is considered separate pricing centre • The administered pricing concept is based on the retention concept which ensures a return on capital employed. SKO. The criteria followed for fixation are: • • Products which are essential for common man are priced under APM High volume products should be administered under the pricing system in overall public interest • Petroleum products are divided into the following categories for the purpose of APM: The categories are :1.Administered Pricing Policy for Petroleum products The pricing of petroleum products in India is governed by the administered pricing mechanism based on accepted recommendations of oil pricing committee appointed from time to time. Other products (Benzene. toluene. comprising of net worth and borrowings. lubes. Return is allowed at 12% net of tax on net worth at actual interest rates on borrowings. Formula Products (viz. . Capital employed. etc) whose prices are determined by market forces or through negotiations between oil companies and bulk industry consumers. 2. Principles followed to carry out pricing through APM: Fixation of selling price of petroleum products is done under the APM of government of India \. MS. etc) are the products whose basic ceiling selling prices are fixed. HSD.

• Operating cost is allowed on normative basis. viz. pricing points have been fixed for petroleum products. etc are compensated separately. Currently all the refineries are primary pricing points for controlled products. Fuel and Loss 4. The price at locations within the pricing zone assigned to a pricing point will be the ex-storage point price plus cost of transportation to that location. The producer’s location (refinery) is fixed at primary point. Normative working capital 5. Each pricing point has an assingned pricing zone. The price of petroleum products (controlled) at all primary points will be uniform. Sales 3. Primary Pricing Point For the purpose of uniformity in consumer pricing (excluding freight and local levies). Production pattern 2. Variations for major factors like long term settlement with employees (LTS). . Government levies. 1. Operating Cost • The crude oil cost forms a bulk of total cost is insulated from the fluctuations of international prices by means of a pool accounts mechanism so that the net cost to the refinery is independent of whether it is processing imported or indigenous crudes. • Returns at the prescribed levels are available to the oil companies if they achieve the prescribed parameters.

The “R” group submitted its report in September.Secondary Pricing Point While ex-storage will be the price at a primary point. the Government. gold plating of the costs would be encouraged. Secondary pricing points are the depots attached to particular refinery. Dr. set up an industry study group to prepare the blue print of the deregulation and tariff reforms required in the oil sector. The ability of oil companies to generate investable surpluses was reduced considerably by the APM which allowed returns on the depreciated net fixed assets. Accordingly. 1996. 1980s and 1990s. The report of this Study Group formed the main input for the strategic Planning Group on Restructuring of Indian oil Industry otherwise known as the “R” group headed by the . in 1995. Vijay Kellar. recommending dismantling of the APM for the following reasons:• Cost Plus compensation did not provide strong incentive for cost reduction thereby breeding inefficiencies. . the price at secondary pricing point will be arrived at the element of transportation cost there on a predetermined basis. Adverse impact on oil companies due to huge deficits in Oil Pool Accounts as price revision was not timely. • With the entry of private sector. But the explosive growth in the late 1990s required the government to call for funds from private and international investors. • • Wide distortion in consumer prices due to subsidies/ cross subsidies. then Secretary P&NG. Import Parity System The APM continued through 1970s. • Absence of internationally competitive petroleum sector in the context of global economy.

MOP&NG recommended the following:• There should be a phased deregulation of the sector spread over a period of four to five year. on deregulation. • In the end. • The customs tariff. • Subsidies should be phases out gradually to within acceptable limits which will be provided through budget. The Government appointed an “Expert Technical Group (ETG)” to study the phasing and tariff structure of the oil sector.4. 1997.The Group’s recommendations were approved by the Government in principle in September. the APM was dismantled for the upstream and refining sector and a partial deregulation took place for the . the duties should be so positioned that the tariff protection becomes 25% of the value addition while the Government revenue is maintained.4. The recommendations of this group were notified in November. culminating in total deregulation by 1. which provided for a negative duty protection needs to be amended so as to attract investments to the sector. Nirmal Singh. • Changes in tariff structure may be done over the transition phase. Accordingly in the first phase. keeping in mind the equilibrium to be maintained between the Governments’ revenue needs. The ETG headed by Mr. effective 1. necessity to keep consumers prices low and the need to increase the profitability of the companies.1998.2002 • The first phase should encompass full deregulation of upstream/refineries and partial deregulation of marketing sectors. 1997 and further action was started. structure. Joint Secretary Refineries.

tariff and other costs the customer would bear if importing. Import Parity is a pricing policy adopted by suppliers of a good for their sales to domestic customers. The dismantling of APM gave rise to establishment of import parity mechanism for calculation of petroleum prices. price is set equal to the world price converted into exchange rated plus any transport. according to which price is set at the opportunity cost of a unit of an imported substituted good. .2002. the Government announced complete dismantling of APM.marketing sector. Subsequently.4. effective 1. As such.

5 Litres/ Vehicl e/ Year 86 1.802 41. therefore.0 13. taken from the report of CPCB (2000) . has a very small impact on inflation due to forward linkages.7 4. annual use of petrol per vehicle is given in the following table Average Annual Consumption of Fuel by Class of Vehicles The average Typ e of Averag e Fue l Efficien cy 73.0 8.278 4. USA.415 Monthly Fuel Cost at price on 1.0 34.5 14.415 15.112 Distance Covered annually Two Wheelers 6300 (Petrol) Three Wheelers Cars Cars MPV Bus (10000) 35000 (40000) 8000 8000 7800 55000 Heavy Trucks 55000 Light Trucks .10 in 320 3835 2210 1566 2461 36. January 2009 Figures in parentheses are estimates for Delhi.6 4. 20000 Source: ’Residential and Transport Energy use in India: Past Trend and Future Outlook’ by Ernest Orlando Lawrence Berkeley National Laboratory.A VIABLE AND SUSTAINABLE SYSTEM OF PRICING OF PETROLEUM PRODUCTS P E T RO L Petrol is largely an item of final consumption.029 593 571 897 13.1. Its price.1 3.913 12.

on an average. more fuel efficient vehicles and an efficiency increase by 20%. Even if the crude price increases to $120 compared to the present price of around $70/barrel. 80 per month. assuming no reduction in use. The additional expenditure of a two-wheeler owner would be only Rs. 2210 per month (Rs. There is no reason to subsidize this class of consumers. the increase on fuel expenditure will be around Rs. 510 in Delhi). will increase by Rs.• A two-wheeler consumes. 86 litres of petrol per year. 320 per month (Rs. 23/litre (i. for which the owner spends Rs. • Full price pass-through at US $ 80/bbl will increase the retail price of petrol by around Rs. • If higher petrol prices lead to less driving.3/litre on account of the current price being below the estimated indicative selling price) and the additional expenditure .e. assuming the current tax regime. will be around Rs. Motorized vehicle owners are largely well-off persons belonging to the upper two/three deciles of the population. the retail outlet price of petrol.160/month on a two-wheeler user and less than Rs. 50 per month (all-India average). • The Group believes that the cost increases can be borne by motorized vehicle owners and recommends that petrol prices should be marketdetermined both at the refinery gate and retail levels. . 1000/month on a private automobile user (at all-India level)..7/litre. The fuel expenditure of car owners is much larger at Rs. Even for twowheeler owners in Metro Cities who drive more (around 10000KM per year).20/litre on the basis of rise in indicative selling price of petrol from $70/bbl to $120/bbl of crude price + Rs. the additional cost would be that much less. 4140 in Delhi). Rs.

3. 2. domestic LPG and PDS kerosene. Almost 20 percent of the price build up of petroleum products is attributed to state taxes. 13.35 per litre on Motor Spirit and Rs.5 percent custom duty on Motor Spirit and diesel and 5 percent custom duty on other petroleum products. There is also the cascading impact of taxes such as entry tax/octroi imposed by State Governments on crude oil. The excise duty on domestic LPG and PDS kerosene has already been reduced to zero.TAXATION At present there is zero custom duty on crude oil. . This needs to be rationalised in order to achieve faster adaptation of domestic price of petrol and diesel to international crude price.60 per litre on diesel. The basic excise duty on Motor Spirit and Diesel (other than branded) has also been reduced to Rs. which will act as the equaliser. petrol and diesel. The Group has already recommended an additional excise duty on diesel-driven vehicle corresponding to the differential tax in the form of higher excise on petrol consumed by average petrol-driven car.

they are generally expected to rise. • The Government has not permitted public sector oil marketing companies to pass global prices to domestic consumers. Given our increasing dependence on imports. Oil price volatility has also increased. The present system of price control on petrol and diesel in particular has resulted in major imbalances in the consumption pattern of petroleum products in the country. Our import dependence has reached 80 per cent and is likely to keep growing. We have examined the impact of the formula-based prescriptive pricing of major petroleum products devised by the Government from time to time. At the same time 2008 saw an unprecedented rise in oil price on the world market. It has also led to . Though future oil prices are difficult to predict. particularly since 2002. and has put undue stress on finances of the PSU oil marketing companies as well as of the Government.RECOMMENDATIONS: • India’s imports of oil are increasing. domestic prices of petroleum products have to reflect the international prices.

This has affected competition in the domestic petroleum product market. An analysis of the trend of petrol consumption by the automobile owners reveals that increase in prices of petrol . • The petrol is largely an item of final consumption.withdrawal of private sector oil marketing companies from the market.

motorized vehicle owners. . Accordingly. it is recommend that petrol prices should be market determined both at the refinery gate and at the retail level.