The petroleum pipeline would provide a lifeline for imports

Nepal Oil Corporation (NOC) has started generating profit on the sale of all petroleum products except cooking gas and currently its monthly net profit stands at Rs 500 million. What is being done with the profit that is being generated?

NOC just started generating profit as prices of oil slumped in the international market. In the past we were in the red due to high prices in the international market. Since we had to sell petroleum products at prices

lower than in the international market, we had to borrow money from private commercial banks, government-run financial institutions and even the government to be able to sell petroleum products at subsidised rates. So far we have borrowed around Rs 37 billion. Of that amount, Rs 12.66 billion was taken from the Ministry of Finance, Rs 20 billion from Citizen Investment Trust (CIT) and Employment Provident Fund (EPF), and the remaining Rs 4.34

billion from various commercial banks. At present, we have prioritised repayment of loans of private commercial banks. Once we settle the debt of commercial banks, we will start repaying loans of CIT and EPF. Lately, private commercial banks have started reducing interest charges on our loans, as we have started repaying them. Currently, we factor in interest charged by financial institutions while fixing retail prices of petroleum products. So, as we start servicing our debt, our interest expenses will go down, which will allow us to further reduce petroleum prices. This will ultimately benefit consumers.

But it was said that profits being generated would be put into the Price Stabilisation Fund. Why has there been a delay in setting up the Fund?

The government is doing its groundwork to set up the Fund and the guidelines regarding it will soon be drafted. Initially, the government will contribute Rs 500 million to the Fund, and after NOC has paid back all its outstanding debt we will deposit all profits into the Fund.

The Price Stabilisation Fund is a sustainable remedy to finance the import of petroleum products, as we can always dip into this fund to sell petroleum products at subsidised rates whenever prices of these commodities rise in the international market. NOC is authorised to adjust prices by up to two per cent based on the reference price.

You mentioned that interest rates being charged by financial institutions have come down. Does this mean the weight of interest rate in the formula devised to derive retail oil prices has come down?

NOC has already started fixing retail prices based on revised interest rates. We started doing this since the enforcement of the automatic pricing mechanism in September of this year. In fact, once we started repaying the loans, the financial institutions started charging rates based on the ongoing market trend. Earlier, CIT and EPF used to charge us interest of 12.5 per cent per annum which has come down to 10.5 per cent. Similarly, commercial banks have cut their rates to 6.5 per cent from 7.5 per cent. Moreover, we have also requested the Finance Ministry to convert the Rs 12.66 billion that was provided to NOC as loans into equity and the ministry is quite positive about it. If the government does agree with our proposal then we will have paid-up capital of Rs 12.76 billion.

Though the automatic pricing mechanism has been enforced, in reality it looks like partial deregulation because the NOC board is still authorised to fix prices and it has been taking time to adjust prices based on the international market price that Indian Oil Corporation (IOC) sends on the first and 16th working day of the English calendar. What is your take on it?

This problem will not occur again because the NOC management has now been authorised to adjust the fuel prices. This decision was recently taken at the minister level.

As the price of Liquefied Petroleum Gas (LPG) has been falling in the international market and since the loss being incurred by NOC on LPG has reduced heavily, don’t you think it is the right time to deregulate LPG price as per the international rate?

We are preparing to introduce automatic pricing in LPG being used by commercial units like hotels, restaurants and industries. Vehicles running on LPG also fall under this category. Approximately 30 per cent of 23,700 tonnes of LPG that is consumed per month is for commercial purpose and as soon as we enforce dual pricing mechanism we will be able to reduce our loss by 30 per cent. For this purpose, we have already asked bottlers to distribute blue-colour cylinders to commercial users of LPG and they have started doing it. We have finalised the guidelines for dual pricing — household and commercial use — and we are waiting for the amendment to the Dual Pricing Enforcement Order, 2012, which the Ministry of Commerce and Supplies has already submitted to the Cabinet. Once we get the Cabinet’s nod we will move ahead with the automatic pricing mechanism for commercial users.

Finally, what is your view on the recent developments regarding the construction of the cross-border petroleum pipeline? Are you positive of the project materialising?

It will definitely be built. A joint team of NOC and IOC is currently working on finalising the memorandum of understanding (MoU) for the pipeline construction. The joint team was formed during the bilateral talks held in the second week of November and it has recommended technical, financial and operational modalities of the pipeline. A report prepared by the team has been provided to governments of both the countries. IOC is all set to construct the pipeline through its own resources and NOC will expand the Amlekhgunj depot through its resources and IOC has agreed to implement both the projects. IOC has also agreed to provide training to NOC staff for the operation. In addition, it has also expressed commitment to expand the pipeline to its Motihari depot as per its plan to shift Raxaul depot to Motihari. The pipeline will provide a lifeline for petroleum import as the Raxaul depot caters to up to 60 per cent of Nepal’s total import. It is estimated that the annual transportation cost of ferrying petroleum products could come down by Rs 500 million once the pipeline is built. We are also positive about the pipeline project because it has received backing of both governments. The Ministry of Commerce and Supplies has also approached the Indian government through its counterpart for early implementation of both the pipeline and depot expansion projects through the Indian government’s grant assistance of around IRs three billion. If India does not extend the grant then we will implement the projects through IOC and Nepal government’s resources as mentioned earlier.

Source: THT