Oil companies boycott Reliance products

Vol 3, PW 17 (15 Sep 99) Midstream & Downstream

Theres still no sign of an end to the dispute between Reliance and state-owned companies over the issue of sales tax paid on petroleum products produced from its 27m tonnes a year (t/y) refinery in Jamnagar.

It is now over two months since the refinery - the biggest in India - began operations. But this report learns none of the state-owned oil companies are prepared to offtake the diesel, petrol, kerosene and LPG which is being produced, leaving Reliance with a growing stockpile.

The reason: a dispute over who will pay the sales tax of 4% - Reliance or the national oil companies Sales tax of 4% is payable on all controlled petroleum products (where the government fixes the price) produced in India. Until now these products have been imported and did not incur sales tax.

National oil companies justify their decision by pointing out that their sales margins will turn negative if they are forced to bear the sales tax burden. At present they make an average 2% profit.

A source tells this report Indian Oil Corporation, for example, is unable to pass on the tax to consumers as prices are set by the governments Oil Coordination Committee (OCC). Result: Reliance has roughly half a million tonnes of unsold product lying in storage tankers.

"If this continues much longer Reliance will have to suspend operations at the refinery", Petrowatch is told. It is believed Reliance has tried hard to get the OCC - by default the Indian taxpayer - to bear the tax burden.

The OCC refused, claiming this would amount to granting a subsidy equivalent to Rs500 crores ($116m) a year. No decision on this contentious issue is expected until a new government is in place.

Reliances only consolation is that it does not face the same headache for decontrolled products such as petroleum coke, naphtha and fuel oil. These products do not incur sales tax.