Energy Technology Expert

How to calculate oil pump price and determine oil company profitability – a suggested procedure for government regulators and oil companies

Finally, your energy technology and pricing expert, Marcial Ocampo, has proposed this action plan to top government officials in the executive and legislative branch of the Philippine Government thru email.  Marcial is hoping that positive action will be accorded to this proposal in order to bring closure to this nagging issue.

This pricing concept with a financial analysis of the oil industry profitability is expected to bring greater understanding on how oil prices should be calculated and imposed on the buying public to ensure that the common interest of the oil supplier and oil consumer are both equitably addressed.

Calculating pump price (cost model)

This paper proposes a transparent procedure for determining domestic pump prices given the MOPS price for imported oil products or DUBAI crude oil price for oil refiners.

The calculation of oil company margin (the portion of the pump price that goes to the oil company since the other costs are pass-thru expenses given to the supplier of oil products, government taxes and other participants in the oil supply chain) is also presented.

I believe that oil company margin based on % of duty paid landed cost (DPLC = FOB + FRT + INS + OCEAN LOSS + DOC STAMPS + BOE FEE + WHARFAGE + DEMURRAGE + CUSTOMS DUTY + SPECIFIC TAX + VAT1) is the most equitable way of providing reasonable returns that could be readily agreed upon by the regulator and oil industry participants.

VAT1 refers to the 12% VAT applied on the imported oil value adding activities.  It is calculated as follows:

VAT1 = (FOB + FRT + INS + OCEAN LOSS + DOC STAMPS + BOE FEE + WHARFAGE + DEMURRAGE + CUSTOMS DUTY+ SPECIFIC TAX) x 12%

The customs duties (0%, 1%, 2% and 3%) is applied on crude oil depending on its CIF price as provided by a DOE department order.

The Specific tax is only applied on gasoline (4.35 PhP/Liter) and avturbo (3.67 PhP/Liter).

The freight and insurance are dependent on the shipper and insurance provider as well as quantity or size of shipment/vessel used.

Wharfage is dependent on the type of product and Philippine Port Authority port charges.

The Board of Energy fee, ocean loss allowance and documentary stamps are a fixed percentage of value of cargo:

CIF = FOB + FRT + INS = cargo, insurance & freight (FOB is the MOPS for products or DUBAI for crude)

BOE FEE = CIF x 0.10%

OCEAN LOSS = CIF x 0.50%

DOC STAMPS = CIF x 0.15%

CUSTOMS DUTY = CIF x 3.0%

Demurrage payments are given in $ per hour or days of delay that is not within the control of the ship.

The DPLC is then converted to Pesos per liter given the exchange rate (say 48.00 PhP/US$) and conversion factor from barrels to liters (42 gal/bbl x 3.7854 liters/gal) = 158.9868 liter/bbl.

DPLC, PhP/liter = (DPLC, $/bbl) x (48.00 PhP/$) / (158.9868 liters/bbl)

Then the pump price becomes a transparent and predictable commodity and may be calculated by anyone as follows:

PUMP PRICE = (DPLC + % oil company margin x DPLC) + (biofuels + depot cost + transshipment + hauling + dealer’s margin + VAT2)

where VAT2 refers to the local value adding activities.  The VAT on local activities is calculated as follows:

VAT2 = (OIL COMPANY MARGIN + biofuels + depot cost + transshipment + hauling + dealer’s margin) x 12%

where OIL COMPANY MARGIN = (% oil company margin) x (DPLC, PhP/liter).

Biofuels refer to 10% ethanol on gasoline products and 1-2% coconut methyl ester (CME) on low sulfur diesel.

Financial analysis to determine profitability (financial model)

Then we could perform a financial analysis on the oil company/oil product as a result of the oil company margin.

1) gross revenue = (sales volume, liters) x (OIL COMPANY MARGIN, PhP/liter)

2) Less expenses = operating costs + supplies & materials + utilities + salaries & wages + admin + marketing + royalties + regulatory costs (permits, fees, licenses, fines) + real property taxes + rent/lease + property insurance + business interruption insurance

3) Equals gross margin (EBITDA)

4) Less depreciation, amortization and interest on loans

5) Equals income before tax (IBT)

6) Less corporate income tax = 30% x IBT

7) Equals income after tax (IAT)

8) Add back non-cash items such as depreciation and amortization

9) Less principal repayment on loans

10) Add other incomes with final tax (e.g. interest income on bank deposits)

11) Less other expenses not tax deductible

12) Equal net cash flow

13) Compare project cost with the net cash flow to arrive at discounted cash flow return on investment (DCF-ROI) and project payback period – use the IRR function of Excel

14) Compare equity portion of project cost with the net cash flow to arrive at the discounted cash flow return on equity (DCF-ROE) and equity payback period – use IRR function of Excel

15) You may also compute debt service coverage ratios (DSCR) to see if there is sufficient cash flow to payoff the debt service (interest + principal repayment)

If the DCF-ROE is approximately 15% p.a. which is the usual hurdle rate for making corporate investments (debt interest may vary from 10-12% p.a. while minimum equity returns for making investments is around 15-18% p.a. depending on the risks of the business), then the assumed % oil company margin is just right and equitable to the oil company investor and the buying public.  The DCF-ROE is commonly known as the discounted cash flow internal rate of return (DCF-IRR).

If the DCF-ROE is less than 15% p.a., then the oil company investor is not recovering his cost of equity.

If the DCF-ROE is much greater than 15% p.a., then the oil company investor is over-recovering and may be profiteering at the expense of the buying public.

I therefore recommend that a committee of experts be constituted immediately to analyze the oil industry profitability using the above financial tools that I discussed above.

If you need assistance in obtaining the values of the above cost inputs and cost factors, as well as securing copies of the cost model for calculating pump price and the financial model for calculating oil company margin to meet investment criteria, please email the author for arrangements.

Regards,

Marcial T. Ocampo

Energy Technology and Energy Pricing Expert

Business Development Consultant

email: mars_ocampo@yahoo.com

energydataexpert@gmail.com