Standard LPG Filling And Bitumen Filling At Refineries

As stated earlier the filling margin recovered on LPG shall be deducted from refining cost while computing retention margins, and the amount so deducted shall be restricted to the standard. Thus the additional margin of Rs50 per mt would accrue as an incentive for the refining companies.

OIL has also set up a LPG filling plant adjacent to its extraction plant at Duliajan, Assam and consequent to OCRC recommendations, this filling plant is treated in par with refinery bottling plants. Accordingly, marketing companies would pay OIL the aforementioned margins of Rs200/ mt for LPG (Pkd) and Rs50/ mt for LPG (Bulk). Since no standards are laid down for OIL, it would be entitled to Rs200 per mt of LPG (Pkd), irrespective of the quantity filled. As in the case of refineries, while computing the retention margin of OIL, the recoveries so made would be reduced.

In respect of bottling plants other than refineries, operating cost excluding depreciation is reimbursed uniformly on the basis of industry average cost. Depreciation cost and return on capital employed are computed for each of the refineries and the retention margin is worked out for each of the oil companies by aggregating the operating cost, depreciation cost and return on capital employed. The weighted average filling margin of refining & marketing companies is built into the selling price and the difference between the margin recovered through the selling price and the retention margin would be adjusted in the Pool a/c. In respect of sales effected out of the bottling done by refining companies, the difference between the margin recovered through the selling price and the margin paid to refining companies shall be surrendered to Pool a/c.

Thus, marketing companies whose operating cost other than depreciation is below the industry average are bound to gain and contrarily companies whose cost is above the industry average will stand to lose.

The details of filling margin per mt of LPG filled ex-marketing bottling plants for the pricing period is given.

Statement showing LPG filling margins ex-marketing bottling plants

In addition to the filling margin, marketing companies are entitled to a uniform marketing margin of Rs640/ mt of LPG packed, recovered through selling price, to cover the following expenses.

• Depreciation on LPG cylinders/ regulators: Rs252/ mt
• Return on Net investment in cylinder/ regulators: Rs196/ mt (Net investment meaning actual procurement cost minus deposits received from consumers)
• Repairs & maintenance: Rs192/ mt

The depreciation#included in the marketing margin represents 1/15th of cylinder cost/ regulators, 100% depreciation for cylinder/ regulator is charged off in the accounts. To compensate oil companies for this depreciation cost, companies are permitted to claim the differential between procurement cost, depreciation & return element#included in the marketing margin from the pool a/c. Each new enrollment brings in a deposit (of Rs900, Rs1500 and Rs2000 for 14.2, 19 kg and 50 kg cylinder respectively) and Rs100 (per pressure regulator). Also, 100% of the cost of cylinders qualifies for depreciation under the Income-Tax rules, hence actual cash inflow to the oil companies for every new enrollment is nearly 2.35 times the actual cash outflow. For eg for every Re1 invested in a cylinder, Re1 from Pool a/c towards depreciation, approximately Re1 from consumers in the form of deposits, and Re0.35p being the tax saving on account of depreciation. Since the depreciation cost reimbursed is treated, as an income, the net cash flow after reducing the impact on such income, is twice that of the investment. In respect of replacements, as no deposit is received the cash inflow is equal to the cash outflow. The actual reimbursement from OCC would be restricted to limit new enrollments so also the norms for replacements. Considering that the total customer population from April 1, 1991 to April 1, 1996 has grown from 16.98mn to 25.70mn, the additional cylinders procured during the period is estimated to be more than 17mn (including double bottled connections). The additional cash generated by the three marketing companies viz IOC, HPC & BPC during the said period is estimated to be more than Rs12bn, considering a price of Rs700 per cylinder. One can safely conclude that LPG business is the most lucrative among the APM products, both in terms of profit and cash generation.

As in the case of MS/ HSD, to ensure uniform pricing, the commission payable to the distributors is determined by the Government of India. The formula for calculation of distributor's commission as on April 1, of every year is the same as applicable to MS/ HSD dealers, excepting for the slabs and factors which would be as under for 14.2 kg domestic (pkd) cylinders.

• Slab I - Up to 3000 refills per monthFactor = 0.31
• Slab II - Beyond 3000 refills per month Factor = 0.33

No such bifurcation regarding slabs have been made for 19kg and 50kg refills.

Unlike the case of MS/ HSD, distributor commission is not revised with changes in administered prices.

For LPG supplied at centers other than refinery points, NRF applicable for bulk LPG is recovered through the selling price from the nearest refinery to the bottling plant located in the upcountry center. The difference between the actual freight and NRF can be claimed by the oil companies from the Pool a/c. As in the case of MS/ HSD, due to various reasons that the product may be supplied from a point other than the contiguous refinery point. Difference in transportation charges in this case can also be claimed from the Pool a/c.

Thus the following adjustments are carried out with the Pool a/c.

• For filling in excess of standards, refineries to surrender Rs150/ mt of LPG (pkd). An amount of Rs50/mt shall be retained by the oil companies as an incentive that shall not be adjusted against the refining cost while computing the retention margins
• For sales effected from cylinders filled in refineries / OIL Duliajan, the marketing companies to surrender the difference between the weighted filling margin (presently Rs920/ mt) and Rs200/ mt to Pool a/c.
• For sales effected from cylinders filled in marketing bottling plants, the marketing companies to adjust the difference between the retention margin and the weighted filling margin (presently Rs920/ mt) in Pool a/c.
• Difference between the LPG equipment cost (to the extent of norms) and the depreciation & return#included in marketing margin.
• Difference in distributor's commission actually paid vis-à-vis the commission recovered through selling price.
• Difference between the actual freight/ transportation cost and NRF#included in selling price.

Filling in packed drums and pricing of packed bitumen

Standards have been set for the bitumen filling in drums at each of the refineries.

A uniform amount of Rs50/ mt of Bitumen packed is to be paid by the marketing companies to the refining companies as compensation for bitumen filling in packed drums. For bitumen filling in packed drums up to the standard level, the recoveries so made shall be deducted from the refining cost while computing the retention margin of refineries. For bitumen filling beyond the norms, the refineries are entitled to retain
Rs10/ mt as an incentive and the balance amount shall be surrendered to the Pool a/c. The incentive so retained shall however not be deducted for computing the retention margins and shall thus accrue to the refineries.

An amount of Rs758.37/ mt of Bitumen (packed) towards drum cost is payable by marketing companies to refineries. This amount#includes the cost of 66 kg of 24G steel (net of scrap), fabrication costs including de-coiling, painting etc and return on investment. Whereas variation in consumption of steel sheets as against the norm of 66 kg/ mt of Bitumen cannot be adjusted in the Pool account, the variation in steel cost (gross of scrap) can be adjusted in the Pool a/c.

An amount of Rs151.67/ mt of Bitumen (pkd) is#included towards excise duty on drums in the price payable by marketing companies. Refineries shall adjust the difference between the actual excise duty and the duty recovered through the selling price in the Pool a/c.

Refineries thus carry out the following adjustments.

• For filling beyond the standard, the difference between Rs10/mt and Rs50/ mt shall be surrendered to Pool a/c
• Variation in drum steel cost vis-à-vis the amount recovered through price without any variation in drum steel quantity
• Variation in excise duty paid on drums vis-à-vis the duty recovered through price

In order to ensure that APM rewards efficiency and penalizes inefficiency, incentives and penalties have been in-built by establishment of standards and norms in almost all areas of operations. A few important incentives and penalties are discussed in the following paragraphs.

Normative working capital & capital work-in-progress

As stated earlier, the oil companies are compensated on normative working capital (NWC) by including it as a part of capital employed. It has no correlation with the actual working capital and variations between the actual working capital and the NWC can significantly affect the fortunes of a company.

Similarly, capital work-in-progress is not reckoned as a part of capital employed and therefore earns no return under APM. This ensures that the companies endeavor to complete the capital projects at the earliest so that the asset starts fetching returns.

Standard product pattern and fuel & loss

Where the value realized from production, after due adjustments for variation in crude mix/ the Government of India directives, if any, is more than standard and the additional value realization is due to improvement in product pattern / lower fuel & loss, the refineries are given an incentive for superior performance. If on the contrary the performance is inferior, there is an in-built mechanism to penalize the refinery. While computing the eligible quantity of crude processed, the actual production is escalated by lower amongst standard fuel & loss and actual fuel & loss. Thus if the actual fuel & loss is higher than standard, the actual crude oil cost, refining cost & margin would be lost on differential between the standard fuel & loss quantity and actual fuel & loss quantity. For example, if for a 6 mmtpa refinery, the standard fuel & loss is 5% and if the actual fuel & loss is say 7%, then on the 2% ie 0.12 mmt, the total loss to the refinery would be equal to cost of 0.12 mmt crude (approx. Rs570mn at current crude price) plus the refining cost and the return it would have otherwise earned on processing of 0.12mmt of crude. The penalty is thus very severe if the actual fuel & loss is more than standard.

Standard crude throughput

The retention margins are worked out per MT of crude throughput for refineries based on the standard throughput for each of the refineries. The actual earning would be a multiple of actual throughput and the retention margin. In case the throughput is more than the standard, additional earnings would be a straight contribution to the bottom-line of refineries, which they are permitted to retain. In case the throughput is lower than standard, the contribution to that extent would be lower for absorption of fixed costs and could result in straight reduction in bottom-line. The bad performance of MRL in 1995-96, for example, can be directly attributed to the throughput being lower than the standard due to the two-month period of unplanned shut down, consequent to fire in one of its plants.

Standard pipeline throughput

In case of pipelines, retention margins is worked out per mt of pipeline throughput based on normative throughput that is a fixed percentage of the installed capacity. Oil companies are allowed to retain additional contribution in case actual throughput is more than the normative throughput and if throughput is lower, the fixed costs will have to be absorbed within the contribution earned.

Specific costs

Norms have been fixed for stock losses of marketing companies and the value thereof is recovered by the oil companies through the selling price. No compensation will be given in case the actual losses are more than the norm and oil companies need not surrender the gains in case the actual losses are lower than the norm. There is thus a strong incentive to reduce product losses.

Sales volumes & SPE

Marketing margins are worked out by dividing the aggregate cost plus return over the SPE volumes. In case the actual sales are more than SPE volumes, oil companies are permitted to retain a part of the margins on all volumes sold in excess of SPE.

Standard LPG filling norms

For all refineries, standard filling quantity is fixed. Any quantity filled in excess of standard would entitle the refineries for an additional amount of Rs50/ mt that would be a straight addition to contribution margins. At present, no penalty is however fixed for filling below the standard.

For all marketing bottling plants, the cost reimbursement is uniform based on industry average. Therefore companies whose operating cost is lower than the industry average are bound to gain and companies whose operating cost is higher are bound to lose, to the extent of differential cost. It may also be noted that as regards marketing plants, no standards have been set and the actual contribution is a multiple of actual quantity filled and the per unit retention margins. Hence, there is a tremendous incentive for LPG filling at these plants. The additional contribution, earned by filling marketing bottling plants, is significantly higher than Rs50/ mt for additional filling in refinery bottling plants.

Standard bitumen filling norms

For all refineries, standard quantities to be filled in packed drums are fixed and for additional filling an amount of Rs10/ mt is given to oil companies. At present, no penalty is however fixed for filling below the standard.

Bitumen steel consumption

For packed Bitumen, 66 kg of 24 g steel is allowed per mt of bitumen. Companies would save in case the actual consumption is lower than the norm and lose in a contrary situation.

Actual settlement mechanisms

The surrenders/ claims are made on a weekly basis and the due dates are 1st, 8th, 16th and 23rd of every month. In case the due date falls on a Saturday or a public holiday, the settlement will be done on the immediately succeeding working day. The adjustments are done in arrears and therefore the claims/ surrenders are for the immediately preceding week. For eg the surrenders made on 1st is in respect of sales made in the 4th week of the previous month.

For refineries, adjustments are carried out every week based on the crude processed in the immediately preceding week. For COPE and C&F claims, other adjustments are carried out on weekly basis based on the production pattern in the immediately preceding fortnight.

For marketing companies, adjustments are carried on the 1st and 8th based on sales volumes of the 2nd month proceeding the current month. The settlement on 16th is based on the actual sales of the immediately preceding month and the same is used for 23rd also. For eg the sales volumes of Oct '96 shall be the basis for determining adjustments for 1st and 8th of Dec '96. The actual sales in November are normally available before the 16th and the actual adjustments for November and first fortnight of December are re-worked. The difference between the actuals for November and the surrenders made during the month of November (based on sales volume of October) is adjusted on 16th. Similarly the settlement for first fortnight of Dec '96 is reworked based on November sales after adjusting the claim/ surrender made on 8th and the differential is adjusted on 16th. November sales is also used for effecting surrenders on December 23, January 1 and January 8, and on January 16, the cycle starts again with the actual sales of December.

Each of the surrenders/ claims made by oil companies are supported by audited statements at the end of every quarter and differential if any between the audited claims/ surrenders and the provisional claims/ surrenders for the quarter is immediately adjusted in the next weekly settlement. Shortfalls due to short payments/ excess claims up to 5% of the audited amount is condoned and any shortfall above 5% shall attract interest at the current cash credit rate.

Apart from these routine adjustments, oil companies have a lot of other claims like refinery incentives, LPG cylinder relief, claims due to LTS, margin updation etc which can be adjusted only after approval of the claim from OCC. There is a time lag between the date for lodging of claims and the date of receipt of approval from OCC. After approval also, oil companies may not be permitted to adjust the claim immediately.

Any claim not settled by OCC from the due date/ date of approval should fetch an interest of 10.50% pa. No interest would however be payable for the period between the date of lodging of claim and the date of approval by OCC.

As stated earlier, the exercise for updation of margins of the oil companies normally starts in the middle of the pricing period and is completed after the end of the pricing period. Ad-hoc margins are released pending final updation. Companies are also allowed claims on account of incremental networth on a year to year basis and the claims so made shall be reduced when the final margins are settled. Thus in a pricing period, arrears of marketing margins of the period are booked over various years and it is also likely that these margins may be determined and accrued in the books of the oil companies only in the next pricing period.