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Philippine Oil Pump Price Calculation Model and Oil Company Gross Margin – Introduction

September 12th, 2012 Posted in Oil Pricing Formula

Philippine Oil Pump Price Calculation Model and Oil Company Gross Margin – Introduction

Introduction

This technical paper will present the various oil pump price calculation model (regulated and de-regulated periods) which together with the supply cost, end pump price, taxes (customs duty, special duty or Estanislao Peso, excise tax or specific tax, value added tax or VAT), biofuels (10% ETHANOL gasoline blend and 2% CME BIODIESEL blend), logistical costs (transshipment, pipeline, depot operation, hauling fee), and dealer’s margin will be subsequently used to calculate the residual component (by difference) that goes to the oil company (refiner, importer/marketer).

 

This residual component is generally known as the oil company gross margin which takes care of the oil company’s costs for refining, storage, marketing, administrative and profit margin. This profit margin provides the economic incentive for an oil company to invest in the business of importing crude oil or finished products and refining the crude oil into finished products such as LPG, gasoline, kerosene, diesel, bunker or fuel oil and asphalt.

Background of the Oil Price Review

The Department of Energy (DOE) Secretary created the IOPRC in response to the growing concerns of the public over the perceived lack of transparency of oil firms in setting of oil prices at the pump amidst rising world prices of crude oil approaching historic highs last seen 2008.  The IOPRC has been tasked to perform a methodical evaluation regarding the business conduct of oil firms to address the public’s clamor for more transparent monitoring and clear understanding of the pricing of imported crude oil and its petroleum products derived from both local refining and importation and trading activities by the oil industry.

Purpose of the Oil Price Review

The primary objective of the IOPRC is to determine whether oil companies have accumulated excessive profits through various means including but not limited to the overpricing of petroleum products upon importation and/or at the retail level.

For this purpose, the Technical Working Group (TWG) under the guidance of the IOPRC members has undertaken to develop the various methodologies to be used for the in-depth analysis of the pricing and market behavior of the Big Three firms (Shell, Petron, Caltex-Chevron) and selected small players in the oil industry.

Composition of the Independent Oil Price Review Committee

The IOPRC consists of seven (7) Principal Members with the Moderator supported by other members from various groups such as the Economists, Academe, Consumer Group, Business Community, Public Transport and Accountants. Under the IOPRC are Members of the Technical Working Group (TWG) nominated by the Principal Members which shall provide expertise leading to the preparation of the following reports:

1) Preliminary Report on Methodology

2) Preliminary Report on Pricing

3) Preliminary Report on Excessive Profits

4) Final Report

Scope of the Oil Price Review

The three model approach builds upon the earlier methods utilized in the 2008 study of SGV-UA&P.  This included (a) the trend comparison of international benchmark crude oil (the raw material) and refined products (the finished products) prices with local pump prices of oil products between 2005 and 2007; (b) the decomposition of pump prices to trace whether the share going to oil companies has grown or shrunk; and (c) a financial review around selected key performance indicators of the major oil companies. The regression analysis will also seek to update and improve upon the regression models used in the “2002 paper of Salas” which provided empirical evidence that pump prices respond more quickly and fully to increases in crude cost rather than to decreases for data from Jan 1999 to February 2002.

From an operations point of view, an oil company as well as a retail station would need additional working capital to purchase the same volume of crude oil for refining or finished product for resale in the event of a price increase of its major inputs such as crude oil and finished products. The enterprise may either uses its retained earnings (undistributed profits), borrow or utilize debt capital, or raises its prices to recover partially, fully or otherwise (overprice) the actual cost increase from its customers, or any combination of the three sources of capital (equity, debt and customers).

If it does not raise capital from the three sources, then its business will shrink, and in due time, its operating income will not suffice to meet its higher operating expenses. Since the business of supplying oil products to the end consumers is of paramount importance to the local economy, the oil company will optimize the allocation of its scarce resources and raise the needed capital with the least cost approach to supply the same sales volume to its customers. And as you have guessed, the least cost approach to raising capital is to use customer’s monies to fund the purchase of the higher cost products.

This behavior is common practice around the world and is not unique in the country. Prices are adjusted immediately in response to price movements in the international market for crude oil and finished products. In some cases, upward price adjustments are staggered to soften the blow of the sharp increase in international prices; hence, when international prices drop, prices are often left unchanged as the drop will negate the remaining staggered adjustment. Downward price adjustments may be delayed relative to drop in international prices since there may be residual under-recoveries that could be recovered without a need for a price increase by simply maintaining for a while the current price until it is recovered. Lastly, competition among oil industry players and retail stations and the need to defend market share will dictate the price adjustment behavior in the industry.

Methodology of the Oil Price Review

The first preliminary report describes the various methodologies currently under development by the Technical Working Group of the Independent Oil Price Review Committee (TWG-IOPRC) to help determine whether excessive profits were accumulated by the Big Three oil firms (Shell, Petron and Caltex-Chevron) and selected independent oil companies since the oil industry was deregulated in 1998.

Upon review of existing data sources, the proposed strategy employs three technical approaches:

1) Regression analysis of historical pump prices and input costs to determine whether statistical evidence exists giving indications of (a) possible asymmetry in price changes (i.e. prices tend to be more sensitive to upward rather than downward movement in the cost of oil imports); (b) possible overcharging by oil firms relative to changes in input costs such as the international price of oil imports and applicable taxes and tariffs; and (c) similar pricing behavior in other comparable countries such as Thailand;

2) Project finance model of an oil refinery or oil marketing company to determine whether the internal rate of return (IRR) of the oil firms is within industry benchmarks; and

3) Oil pump price calculation model to determine the extent of the gross margins within pump prices per oil product;

To fulfill the data requirements of the statistical, financial and calculation models, the primary activities of the TWG involved data gathering and public consultations.  Daily, weekly and monthly data on pump and Dubai crude oil prices as well as Mean of Platts Singapore or MOPS finished product prices (gasoline and diesel) from as far back as 1984 to early March 2012 were obtained from DOE. A schedule of tax and tariff changes on oil products was obtained from DOE to help isolate price changes more attributable to firms than external factors. Consultations with civil society and consumer organizations, shipping and land transport groups, pipeline operator and government agencies involved in the monitoring of oil companies such as the Bureau of Internal Revenue and the Bureau of Customs were also held to help determine the validity of assumptions behind the oil pump price calculation model.

Limitations of the Oil Price Review and Data Sources

The projected results from the above-mentioned statistical, financial and calculation models are constrained by the following factors: The regression analysis will use average weekly prices of unleaded gas and diesel from 1994 to early 2012 that are collected from the DOE. The results will be for the oil industry as a whole until firm-specific data is made available to the TWG. Data on oil prices in Thailand were provided by DOE as sourced from their counterparts from Thailand.  The historical time-series data is also subject to statistical tests to ensure that the data complies with the underlying assumptions of regression analysis.  Note that the conclusions derived from this statistical analysis may reveal scientific evidence that is highly suggestive in favor of a particular hypothesis but is still based on inferred relationships between the data variables and thus will not yield information that is considered as unquestionable proof.

The project finance model used to determine the economic returns (IRR) of the enterprise requires determination of invested capital over time that has depreciated with continued use, but which its replacement cost has likewise appreciated due to inflation in the cost of procuring and installing the equipment. Hence, it requires the valuation of capital investments prepared by independent accredited property appraisers and valuation engineers. Also, it requires the use of audited financial statements submitted to the SEC to establish the annual net cash flow of the oil company. Depending on various accounting treatment by the company and its external appraisers and auditors, the value of the invested capital and annual net cash flow may vary from usual accounting standards; hence, providing varying results, findings and conclusions.

The OPPC model requires numerous data that are at times difficult to obtain or verify such as import entries on quantity, value and product density and various cost factors such as Dubai crude oil price and MOPS of finished products, ocean freight, ocean insurance and application of BOC tables for the calculation of customs duty, brokerage fee, bank charges, arrastre charge, wharfage charge, import processing fee, customs documentary stamp, excise (specific) tax and VAT on the importation activities to arrive at the Tax Paid Landed Cost (TPLC) of the crude or product.

The coverage of this oil price review is broken down into the following regulatory era, namely: regulated period, unregulated period and the RVAT period as shown below:

Table 1: COVERAGE OF SAMPLE DATA

 

Era

Unleaded Gas

Diesel

Regulated 1 Jan 1973 – 13   Mar 1998 1 Jan 1973 – 13   Mar 1998
Unregulated 14 Mar 1998 – 31   Oct 2005 14 Mar 1998 – 31   Oct 2005
RVAT 1 Nov 2005 – 9   Mar 2012 1 Nov 2005 – 9   Mar 2012
Source: DOE

The various executive orders, republic acts affecting the Tax Paid Landed Cost of unleaded gasoline and diesel are shown below:

Table 2: LIST OF MILESTONE EVENTS AFFECTING THE TAXATION OF UNLEADED GAS AND DIESEL

 

Event

Date   of Effectivity

UNLEADED   GAS

DIESEL

VAT

Tariff

Special   Duty

Excise   Tax

Tariff

Special   Duty

Excise   Tax

EO 470

20-Aug-91

20%

1.00

20%

1.00

RA 6965

19-Sep-90

2.52

0.45

EO 115

27 Jul-93

2.00

2.00

EO160

23 Mar 94

1.00

1.00

RA 8180

2-Apr-96

7%

3%

RA 8184

14-Aug-96

0.00

4.35

0.00

1.63

EO 461

4-Jan-98

3%

3%

RA 8479 – Oil Deregulation Law

14-Mar-98

EO 336

1-Jan-05

5%

5%

EO 440

1-Jul-05

3%

3%

RA 9337 – RVAT

1-Nov-05

4.35

0.00

10%

1-Feb-06

12%

EO 527

1-Jun-06

2%

2%

1-Jul-06

3%

3%

17-Jul-06

2%

2%

1-Oct-06

3%

3%

EO 691 – Automatic Tariff Adjustments

1-Feb-08

1%

1%

1-Mar-08

2%

2%

1-Apr-08

1%

1%

1-Jun-08

0%

0%

1-Oct-08

1%

1%

1-Nov-08

3%

3%

EO 850 – CEPT

1-Jan-10

0%

0%

EO 851 – ASEAN

1-Jan-10

0%

0%

EO 890

4-Jul-10

0%

0%

RA 9367

May-07

1%

CME B1 biodiesel

Jan-09

2%

CME B2 biodiesel

Jan-09

5%

ethanol E5 bioethanol

Jan-11

10%

ethanol E10 bioethanol
Source: Department of Energy (as of 26   April 2012)

The Bureau of Customs provided the table for brokerage fees and import processing fees in addition to customs document stamps of P256 per import entry:

Table 3: BUREAU OF CUSTOMS BROKERAGE FEES

(May 22, 2001 CUSTOMS ADMINISTRATIVE ORDER NO. 01-2001)

Dutiable Value of

Old   Rate

New   Rates

Shipment

Pesos

Pesos

Up to P10,000

885.95

1300

Over P10,000 to 20,000

1,328.91

2,000.00

Over P20,000 to 30,000

1,771.91

2,700.00

Over P30,000 to 40,000

2,214.84

3,300.00

Over P40,000 to 50,000

2,433.38

3,600.00

Over P50,000 to 60,000

2,657.82

4,000.00

Over P60,000 to 100,000

3,100.79

4,700.00

Over P100,000 to 200,000

3,543.75

5,300.00

Over P200,000

5,300 +   1/8 of 1% over P200,000

 

Table 4: BUREAU OF CUSTOMS IMPORT PROCESSING FEES

(May 22, 2001 CUSTOMS ADMINISTRATIVE ORDER NO. 02-2001)

Dutiable Value of

New   Rates

Shipment

Pesos   per Entry

Up to P250,000

250.00

Over P250,000 to 500,000

500.00

Over P500,000 to 750,000

750.00

Over P750,000

1,000.00

The customs dutiable value is the CIF value after adding the freight on board (FOB which is also the MOPS of the finished product or the value of the DUBAI crude oil), ocean freight (around 2% of FOB) and ocean insurance (around 4% of FOB).

Bank charge at the rate of 0.00125 of the CIF value is also levied.

Arrastre charge of P122 per metric ton is then collected by the port operator (e.g. CTSI) while a wharfage charge of P36.65 per metric ton is collected by the Philippine Port Authority (PPA).

An excise tax or specific tax has been levied by the national government on gasoline (4.35 P/L) and diesel (1.63 P/L). Presently, however, only gasoline, avturbo (3.67 P/L) and lubes (4.50 P/L) have excise taxes as diesel has been exempted from the excise tax being a delicate transport fuel commodity. However, all of the products including diesel have VAT of 12% on all importation activities.

Then local value-adding activities are aggregated such as oil company gross margin (OLGM), other oil company costs (OOCC) such as transshipment (TS), pipeline (PL), depot (DE), biofuels (BF), hauler’s fee (HF) and dealer’s margin (DM), in order to calculate the 12% VAT on all local value adding activities. The pump price is then calculated by adding all the above cost factors, which in certain cases are different from the actual pump price adopted by the oil companies. There may be small as well as significant errors on the estimates of certain cost factors since not all companies surveyed provided the requested local costs.

Table 5: LOCAL VALUE-ADDING ACTIVITIES FOR GASOLINE AND DIESEL (Average value from Oil Company submission to the IOPRC 2012)

Unleaded   Gasoline

TS

DE

BF

HF

DM

% BF

Pure   BF

2005

0.100

0.120

0.000

0.150

2.000

0.00%

0.000

2006

0.321

0.110

0.000

0.163

1.600

0.00%

0.000

2007

0.337

0.343

0.000

0.155

1.467

0.00%

0.000

2008

0.357

0.345

0.000

0.168

1.467

0.00%

0.000

2009

0.335

0.270

2.680

0.181

1.475

5.00%

53.609

2010

0.391

0.312

3.364

0.156

1.452

5.00%

67.280

2011

0.553

0.286

3.445

0.181

1.596

10.00%

34.447

2012

0.523

0.312

3.779

0.360

1.826

10.00%

37.790

Diesel

TS

DE

BF

HF

DM

% BF

Pure   BF

2005

0.100

0.120

0.000

0.150

1.500

0.00%

0.000

2006

0.321

0.305

0.000

0.163

1.300

0.00%

0.000

2007

0.337

0.343

0.578

0.155

1.267

0.67%

57.750

2008

0.357

0.345

0.854

0.168

1.267

2.00%

42.700

2009

0.463

0.270

1.068

0.181

1.250

2.00%

53.418

2010

0.449

0.308

1.025

0.156

1.286

2.00%

51.260

2011

0.553

0.295

1.523

0.181

1.300

2.00%

76.133

2012

0.523

0.311

1.234

0.197

1.472

2.00%

61.679

 

Table 6: LOCAL VALUE-ADDING ACTIVITIE FOR GASOLINE AND DIESEL (Estimated from historical DOE data)

Unleaded   Gasoline

TS

DE

BF

HF

DM

1973

0.016

0.016

0.029

0.157

1974

0.016

0.016

0.029

0.157

1975

0.016

0.016

0.029

0.157

1976

0.016

0.016

0.029

0.157

1977

0.016

0.016

0.029

0.157

1978

0.032

0.031

0.057

0.313

1979

0.032

0.031

0.057

0.313

1980

0.032

0.031

0.057

0.313

1981

0.032

0.031

0.057

0.313

1982

0.032

0.031

0.057

0.313

1983

0.032

0.031

0.057

0.313

Unleaded   Gasoline

TS

DE

BF

HF

DM

1984

0.032

0.031

0.057

0.313

1985

0.032

0.031

0.057

0.313

1986

0.032

0.031

0.057

0.313

1987

0.032

0.031

0.057

0.313

1988

0.063

0.063

0.114

0.626

1989

0.063

0.063

0.114

0.626

1990

0.063

0.063

0.114

0.626

1991

0.063

0.063

0.114

0.626

1992

0.063

0.063

0.114

0.626

1993

0.063

0.063

0.114

0.626

1994

0.063

0.063

0.114

0.626

1995

0.063

0.063

0.114

0.626

1996

0.063

0.063

0.114

0.626

1997

0.079

0.089

0.171

0.746

1998   (transition)

0.100

0.125

0.250

0.913

1999

0.100

0.125

0.250

0.913

2000

0.100

0.125

0.250

0.913

2001

0.100

0.125

0.250

0.913

2002

0.100

0.125

0.250

0.913

2003

0.100

0.125

0.250

0.913

2004

0.100

0.125

0.250

0.913

 

Diesel

TS

DE

BF

HF

DM

1973

0.016

0.016

0.029

0.126

1974

0.016

0.016

0.029

0.126

1975

0.016

0.016

0.029

0.126

1976

0.016

0.016

0.029

0.126

1977

0.016

0.016

0.029

0.126

1978

0.032

0.031

0.057

0.253

1979

0.032

0.031

0.057

0.253

1980

0.032

0.031

0.057

0.253

1981

0.032

0.031

0.057

0.253

1982

0.032

0.031

0.057

0.253

1983

0.032

0.031

0.057

0.253

Diesel

TS

DE

BF

HF

DM

1984

0.032

0.031

0.057

0.253

1985

0.032

0.031

0.057

0.253

1986

0.032

0.031

0.057

0.253

1987

0.032

0.031

0.057

0.253

1988

0.063

0.063

0.114

0.505

1989

0.063

0.063

0.114

0.505

1990

0.063

0.063

0.114

0.505

1991

0.063

0.063

0.114

0.505

1992

0.063

0.063

0.114

0.505

1993

0.063

0.063

0.114

0.505

1994

0.063

0.063

0.114

0.505

1995

0.063

0.063

0.114

0.505

1996

0.063

0.063

0.114

0.505

1997

0.079

0.089

0.171

0.650

1998   (transition)

0.100

0.125

0.250

0.853

1999

0.100

0.125

0.250

0.853

2000

0.100

0.125

0.250

0.853

2001

0.100

0.125

0.250

0.853

2002

0.100

0.125

0.250

0.853

2003

0.100

0.125

0.250

0.853

2004

0.100

0.125

0.250

0.853

Finally to complete the oil pump price picture, the main oil price determinants such foreign exchange rate (Peso to US Dollar), crude oil import cost such as Dubai, and finished product import costs (gasoline products as Premium 95 RON and Unleaded 93 RON and diesel products with 0.50%, 0.25% and 0.05% Sulfur) are presented in Annex D.1 of this technical paper.

 

2 Responses to “Philippine Oil Pump Price Calculation Model and Oil Company Gross Margin – Introduction”

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