Oil trade: Import parity price basis to continue
06, Mar 2012

The existing system of importing oil from India on import parity price (IPP) basis will stay while the price adjustment factor (PAF) is likely to be scrapped when Nepal and India review their petroleum supply agreement. The IPP is a pricing policy adopted by suppliers of products for sale to domestic customers, and Indian Oil Corporation (IOC) has put Nepal in the same category. Though the High-Level Petroleum Sector Reform Taskforce had asked Nepal Oil Corporation (NOC) to import fuel on an export parity price (EPP) basis so that fuel prices could be relatively lower, NOC said that it was not feasible to do so as it requires Nepal to present the total export value of the crude oil to IOC. "Besides, IOC will not agree to supply products on EPP basis," an NOC official said. The two countries review the agreement every five years. It expires on March 31, 2012. "The import of petroleum products from India on IPP basis will stay in the new agreement," said NOC's acting managing director Suresh Kumar Agrawal. 

The high-level panel had underlined that NOC has been paying an additional Rs 6.40 billion in import bills annually due to fuel imports based on IPP basis.  The 2002 agreement introduced the IPP system under which IOC fixes oil prices for Nepal as per international spot prices. IOC reviews export prices of petrol and diesel every 15 days and of other products such as kerosene, aviation fuel and LPG on a monthly basis. Meanwhile, the new agreement is likely to put an end to the PAF. While IOC has agreed to rebate IC Rs 350 in its marketing margin charged to Nepal under the PAF. IOC has been charging 5 percent marketing margin in the petroleum products for Nepal. 

NOC officials said that IOC refused to deduct its marketing margin to below 5 percent, however, it has agreed to a rebate of IRs 350 on the marketing margin. The PAF includes refinery charge and transportation charge among other technical losses. 

The end of the PAF and a discount on the marketing margin would save NOC Rs 120 annually. Currently, under the PAF, NOC has been paying Rs 2.50 billion to IOC. In 1974, Nepal signed a memorandum of understanding (MoU) on petroleum supply with India which has governed the import of petroleum products in Nepal.

Under the high-level committee's recommendation that the government should also be involved on the oil agreement issue to remove past difficulties in the next accord with IOC, Agrawal said that the upcoming agreement will incorporate representatives from the government and NOC. On July 15, 2011, the Ministry of Commerce and Supplies formed a committee, as per the high-level committee's recommendation, under the coordination of the secretary of the ministry to evaluate the existing petroleum supply agreement and recommend improvements. The committee includes joint secretaries from the Finance, Law and Foreign ministries and representatives from NOC. In the first six months of the current fiscal year, Nepal imported petroleum products worth Rs 40 billion. In the last fiscal year, total imports stood at Rs 76 billion and NOC expects the figure to swell to Rs 100 billion this fiscal year.

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