Israeli attack on Lebanon worries NOC

July 18, 2006
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By Indra Adhikari

Lebanese firefighters attempting to put out a blaze in Kfarshima. (Photo source: cnn.com)
Kathmandu– The on-going offensive by Israel on Lebanon has escalated tension between Arabs and Israel and sent world oil markets into jittery. Thousands of miles away, the state-run Nepal Oil Corporation (NOC) is also feeling the heat.

On Monday, the price of crude oil in the international market rose to USD 78 per barrel. The increasing price in the international market is not only the factor that has made the NOC incur losses. There are few internal factors that added fuel to the loss in the business of the NOC.

For the last seven years, losses of the state-own Nepal Oil Corporation (NOC) – that enjoys monopoly in the import of Petroleum (POL) products — has reached a new high with unprecedented hike in the price of POL products in the international market.

The present debt of the Corporation, that includes debt to various banks in the country and Indian Oil Corporation (IOC), has reached well over Rs 10 billion. Of these the NOC has to pay Rs 6.26 billion to the IOC alone.

According to NOC, the supply cost of IOC for Nepal as per the rate on July 1, 2006 is Rs 44.83 per liter for petrol, Rs 49.69 for diesel, Rs 48.80 for kerosene, Rs 47.42 for air fuel and Rs 726.06 per cylinder LP gas. This is much lower than the present free market retail price in India.

The internal tax imposed by the government is one of the major reasons that has increased the fuel prices. Taxes include VAT, special tax, local tax and road construction tax. The government levies Rs 24.83 tax per liter of petrol. Similarly, it is Rs 9.69 for one liter of diesel, Rs 2.07 for kerosene, Rs 9.34 for air fuel and Rs 188.77 per cylinder of LP gas. The NOC paid more than Rs 3.88 billion to the government in various taxes in the fiscal year 2004-05. It was around Rs 1.5 billion in the fiscal year 1998-99.

Transportation cost is the other factor for increasing retail prices of POL products in Nepal. It costs around Rs 1.46 to transport one liter of petroleum product from bordering Indian town of Raxaul to Kathmandu. The cost goes up as the fuel is transported to hilly and mountainous districts. “Petroleum dealers are demanding increase in the transportation charge which is likely to push the fuel prices further,” said Mukunda Dhungel, spokesperson at the NOC.

Adding all these charges, the current loss of the NOC stands at Rs 8.92 in one liter of petrol, Rs 11.85 in diesel, Rs 8.17 in kerosene, Rs 5.77 in air fuel and Rs 189.25 in per cylinder of LP gas. The prices of petrol and diesel fluctuate every fortnight while prices of other products change every month. In total, the loss for the month of July is likely to reach Rs 666.5 million, according to NOC.

Officials say prices of POL products in India is much higher compared to Nepal. As of June 5, 2006 the retail price of petrol per liter in Delhi was Rs 76.01, in Kolkata it was Rs 81.71. Similarly, the retail price of other products is given in the following table:

Items

Delhi

Kolkata

Kathmandu

International (May) US$/barrel

Petrol/liter (June)

76.01

81.71

67.25

86.24

Diesel/liter (June)

51.95

55.93

52

87.52

Kerosene/liter (April)

14.48

14.88

41

85.65

Air fuel/liter (July)

66.08

74.50

55

 

LP gas/cylinder (June)

471.6

480.8

900

 

The POL prices have increased by about four times over the last four years in the international market. The price of petrol per barrel in January 2002 stood at US$ 20.01 while it was US$ 86.24 as of May 2006. Similarly, the price of diesel has increased to US$ 87.52 in May this year from US$ 21.71 in January 2002 and that of kerosene to US$85.65 from 23.09. Back in Nepal the retail price of petrol increased by Rs 15 per liter over this period. Similarly, the price of diesel has increased by Rs 29 per liter, price of kerosene by Rs 24.

The prices of crude oil have been increasing daily in the international market reaching around US$ 78 per barrel during the weekend. The Organisation of Petroleum Export Countries (OPEC) has not decided to reduce the price and increase fuel production. This means that prices will go on increasing further.

President of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Chandi Raj Dhakal and journalist Gopal Tiwari (second and third from left) in a post budget interaction program in Kathmandu, Monday, July 17 06. nepalnews.com/rh

People queuing in front of petrol pumps (File photo)
On the other hand, demand for fuel is increasing in Nepal. More demand mean more losses to NOC. Over the last four years, demand for fuel has nearly doubled. Most of this is in Central Development Region– which includes capital Kathmandu– where more than 68 percent of the total imported fuel was consumed in the last fiscal year. This is due to increasing import of automobiles in the country. According to Department of Transport Management, the import of automobiles over the period of first eight months in the fiscal year 2005-06 increased by 43 percent. The rate increased by 15 percent after the announcement of ceasefire in late April this year.

According to NOC spokesperson Dhungel, if the current losses continue, there will be no other alternative than to declare the NOC bankrupt. The right to adjust price at par with the international market given to NOC by the then Sher Bahadur Deuba government was annulled by the royal government last year. Since then, losses are increasing at more than Rs 560 million every month. The new Seven Party Alliance government, too, has failed to address the volatile situation fearing popular anger.

A noted economist and president of Nepal Economic Association, prof. Biswombher Pyakurel says the only permanent solution to this loss making oil business is to incorporate private sector and hand over the business to them gradually. “The government should ask the NOC to allow the private sector to use its infrastructure, bring down its overhead expenses, losses incurred due to unused reservoirs, downsize its staff and institute a body with authority to regulate prices of POL products at par with international market prices to avert further losses and prevent NOC from going bankrupt,” he added.

Busy with the political agenda, Nepal government has shown no seriousness so far to avert this imminent crisis