The South Korean government’s decision to base compensation for oil refiners under the price cap system on production costs is raising concerns in the industry. While the plan allows for reasonable profit margins, the lack of specific guidelines on loss recognition and the provision that allows the Minister of Trade, Industry and Energy to determine final compensation amounts, contrary to the committee's recommendations, has left refiners apprehensive.
According to the draft regulations for financial support related to the oil price cap, announced by the Ministry of Trade, Industry and Energy on June 21, the products eligible for compensation include regular gasoline, automotive and marine diesel, and kerosene. The ministry had previously postponed the announcement of the seventh price cap on June 18, opting to extend the sixth price cap while releasing the compensation guidelines.
The cost calculation criteria outlined in the draft include the cost of crude oil imports, production and sales costs, and other related expenses. The crude oil import costs encompass the purchase price of crude oil and other petroleum products, transportation fees, insurance, and ancillary costs. Production and sales costs include depreciation, labor costs, fuel expenses, and domestic distribution costs.
However, the lack of clarity regarding other related expenses has sparked controversy. The draft defines these expenses as only those directly linked to production and sales activities. Critics argue that compared to the previous price cap system from 1994 to 1996, which included various costs such as crude oil import expenses, exchange rate fluctuations, interest costs on crude oil imports, and tariffs, the current draft lacks specificity.
Another concern is the broad discretion granted to the government. While the draft states that costs should be calculated individually for each refinery, it also allows the Minister of Trade, Industry and Energy to use average costs across the industry if deemed necessary. This means that while the principle of individual calculations is maintained, industry averages could influence the cost verification process, leaving room for variability in compensation amounts.
The draft also falls short of addressing the industry's demand for compensation based on international price standards. Refiners argue that since domestic supply prices are capped, losses should be calculated based on market prices, such as those for Singaporean petroleum products. They also highlight significant opportunity costs from potential exports. However, the government’s proposal focuses on actual input costs, suggesting that the compensation amounts may be lower than industry estimates.
Given the nature of petroleum products, clearly distinguishing costs by product type is challenging. Refining crude oil simultaneously produces gasoline, diesel, kerosene, and naphtha. Discrepancies in prices between the time of crude oil import and product sale, exchange rates, inventory evaluations, and distribution costs will also be contentious issues. Differences in refinery configurations, product yields, and export ratios among companies mean that even applying the same criteria could result in varying compensation amounts.
An industry representative stated, "The draft regulations present somewhat broad criteria, making it crucial for refiners to clearly demonstrate their actual losses during the documentation process. The specific calculation methods and recognized ranges are expected to become clearer once the price cap settlement committee officially convenes and discussions begin."
* This article has been translated by AI.
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