CONTENT

About APM.
Features of APM.
How is APM operated.
How does APM work in India.
APM dismantling.
Benefits of APM dismantling.
Changes after dismantling of APM.
Disadvantages of APM

ABOUT APM

Administered pricing mechanism (APM) came into existence on 1977.

APM was administered by oil coordination committee(0cc) ,under the
ministry of petroleum and natural gas.
Prior to APM the realization of oil companies was restricted to the import
party price of finished good.

FEATURES OFAPM
The pricing of petroleum products for the refining and marketing units is based
on the retention concept where under oil refineries, oil marketing companies and
the pipelines are compensated operating costs and return @ 12 per cent post
tax net worth.
For consumers, the selling price of a product was arrived at by adding the
applicable freight from the oil refinery to the Depot and from Depot to the Retail
Outlets .
The principle of compensating normative cost and allowing a pre-determined
return on investments.

HOWIS APM OPERATED

The entire administered pricing system is operated through a oil industry pool
account wherein inflows and outflows of the pool account are to be kept in
balance due to international price variation.

Price adjustments have to be made from time to time to balance the oil pool
account.
To maintain the prices of kerosene and domestic LPG as well as naphtha and
furnace oil for fertilizer

HOW DOESAPMWORK IN INDIA

UndertheAPM,pricesin thehydrocarbonsector arecontrolledatfour stages:1.Production
2.Refining
3.Distribution
4.Marketing
PRODUCTION
The national oil producing companies like Oil &Natural Gas Corporation (ONGC)
and Oil India Limited (OIL) are compensated for their operating expenses and
allowed a 15 per cent post-tax return on the capital employed. Both ONGC and
OIL sell crude to refiners at $7-8 per barrel as against the prevailing international
price of $17-18 per barrel

REFINING
The refining sector is also regulated by APM wherein the refiners are fully
compensated for the acquisition cost of crude and other raw materials as well as
operating costs with a guaranteed 12 per cent post-tax return on the net worth.

DISTRIBUTION
At the distributors level, the dealers commission and margins are regulated by
the government to maintain uniformity in the commission rate. Freight for import
of crude is paid to Indian shipping companies at acost-plus rate, which is much
higher than the market rate

APM DISMANTLING
What does the term APM dismantling mean?
Ans:The term literally implies the removal of an administered pricing mechanism of petroleum products and a
gradual shift towards a pricing based on pure market dynamics.
Dismantling of APM.

In September 1997,the government has decided to dismantle Administrative Pricing Mechanism (APM) in
phased manner . By April, 2002 it will be fully dismantled and prices of petroleum products will be
determined on the basis of import parity system.
BENEFITS OF DISMANTLING THEAPM

Improvement in the competitiveness of domestic petroleum industry.

creating market conditions necessary to attain the economic pricing regime for petroleum products.
Providing subsidies in a more transparent manner through the fiscal budget of the Government.
Emergence of a free and globally competitive market with minimal intervention, thereby benefiting
both the consumers of petroleum products and the petroleum industry.

.
CHANGES AFTER DISMANTLING OFAPM

Consumer prices of petrol and diesel will become market determined.[ All petroleum products will

be sold at market prices]

Subsidy on kerosene and domestic LPG will be phased out in3to5years.
Pricing of crude oil produced by ONGC and Oil India will become market determined.
Govt. will also provide freight subsidies for supply of kerosene and domestic LPG in far-flung
areas and the hilly areas.

REPORT 2002
FAQs on APM/Oil Pool Account
What is the role of the Administered Price Mechanism (APM)?
The efficiency of the APM depends entirely on the ability of the system to keep the OPA in balance.
What is the APM based on?
The APM is based on the retention concept under which refineries, marketing companies and
pipelines are compensated operating costs and are allowed a return of 12% post-tax net worth.
Now that APM has been dismantled, what is to be done with the OPA?
Post-dismantling of APM, the entire oil pool deficit has been transferred to the general budget.
Who will be the major gainers of the deregulation process?
The major gainers of the deregulation process will be old players in the oil sector with depreciated
units like Cochin Refineries, Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation.
Why will the new refineries be hit after the dismantling of APM?
New refineries like Mangalore Refineries, Essar Oil and Reliance Petroleum will be hit postdismantling as their refining margins under the market determined pricing mechanism would be lower
than that under APM. In addition to this, net profit will also be affected by high interest and
depreciation out-go.

What is the Oil Pool Account?

The Oil Pool Account (OPA) is an account maintained by the government to provide uniform and
stable oil prices by balancing high and low input costs.
How does the OPA help the government?
The system of maintaining an OPA helps the government to administer the prices of petroleum
products according to socio-economic requirements.
How much is the Oil Pool Deficit in India?
Our Oil Pool Deficit currently stands at Rs 13,000 crore.
Was the OPA ever in surplus?
The OPA was in surplus till the late eighties. But the 1990s saw a deficit and by 1997, the account
recorded a deficit of $ 5 billion, leaving the government the option to issue oil pool bonds. With
international crude prices falling as low as $11 per barrel in early 1999, the OPA showed a minor
surplus and this resulted in the oil pool bonds being redeemed.
What leads to a deficit in the OPA?
Events like hardening of international crude oil prices, an explosive growth in the consumption of
subsidised petroleum products and the APM are the main contributors to any deficit in the OPA.
How much were the public sector oil companies entitled to charge?
The two national oil companies, ONGC (Oil and Natural Gas Commission) and OIL (Oil India Limited),
were entitled to charge 77.5% of the FOB (free-on-board) price prevailing in the world market from oil
refineries.
Of the realisations from oil, how much does the OPA get?
The OPA gets 22.5% of the landed cost of crude oil.
What is Indias approximate import bill on oil?
Indias import bill for the year 2000-01 was estimated to be Rs 528 billion.
How much is Indias subsidy bill on kerosene, LPG and diesel?
In 2000-01, India had a subsidy bill of Rs 7,360 crore for kerosene, 6,640 crore for LPG and Rs 9,130
crore for diesel.
How much was the demand for LPG and kerosene?
The total demand 4.7 mln tonne for LPG and 6.7 mt for kerosene in Apr-Nov 2001.