KARACHI – Fears of a political backlash with regards to increasing product prices may compel the government to trim the deemed duty on High Speed Diesel to five percent in March, but this move is likely to be resisted by local refineries and any changes made to deemed duty may prove to be short-lived.
While deemed duty on local production is collected and retained by refiners; 7.5 percent duty on HSD is collected by the government on imported HSD. Freezing HSD consumption at FY10 level of 5.35 billion litres translates into a revenue loss of Rs 23 billion for the government calculated at current deemed duty level of Rs 4.39/liter.
February 2011 Industry Gross Rent Multiplier (GRM) has been registered at $4.82/bbl; removal of deemed duty trims industry GRM to $2.08/bbl. Accounting for processing cost of $1.50-2.00/bbl would effectively render local refinery sector operations unsustainable.
It is noteworthy that local energy goods production accounted for 40 percent of total consumption (20.34 million metric tonnes) in FY10 forcing imports worth $6.5 billion in refined POL products. At current price levels, the total import bill of crude oil and refined POL products (assuming FY10 consumption patterns) would amount to $11.7 billion.
The shutdown by refineries would lower annual crude oil payments by $4.2 billion while spiking refined product payment to $12 billion on account of higher import of finished goods. This translates in an additional outflow of $293 million per annum if local refiners were to cease operations.
The government is reportedly considering the lowering of deemed duty on HSD by 250bps to five percent in a bid to stave off the impact of escalating international oil prices. The initial duty cut is part of phased removal of deemed duty with a proposal of complete elimination by Jun 2011 being considered.
It is pertinent to mention that the Ministry of Petroleum is reportedly considering phased removal of 7.5 percent deemed duty on HSD by June 2011. According to sources, talks broke down during the parliamentary meeting held on January 31, 2011, due to Khyber Pakthunkwa’s reluctance to accept deregulation of Inland Freight Equalisation Margin (IFEM) as this would translate in an upward adjustment in petroleum product prices sold in the province.
The petroleum minister has clarified that current prices are a temporarily relief with the parliamentary meeting expected to revisit the proposals for changes in pricing structure in its next scheduled event.
