Petroleum product price cap frozen again; refiners face a 'double burden' from compensation settlements and export restrictions

[Financial News] The government’s fourth consecutive freeze on maximum prices for petroleum products has put the settlement of compensation payments to refiners and the easing of export restrictions among the key issues facing the industry. With international oil prices hovering around $100 a barrel, domestic supply prices remain fixed at late-June levels, limiting refiners’ ability to adjust prices.
According to the government and industry on the 16th, the Ministry of Trade, Industry and Energy is freezing the maximum price for petroleum products for an 11th round, effective from the 17th. Refiners’ supply prices will therefore remain at 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene. After the seventh-round cap was cut by 150 won per liter in late June, the same prices have been applied for four consecutive rounds, from the eighth through the 11th.
The gap between international petroleum product prices and domestic supply prices remains wide. As of the 15th, international gasoline prices stood at $133 a barrel and diesel at $170. Diesel, in particular, continues to command a high price on international markets, while its domestic supply price is capped under the maximum-price system.
As a result, settling compensation payments has become a top concern for refiners. The Maximum Price Settlement Committee is reviewing cost data submitted by each refiner. Compensation is calculated based on the difference when costs plus a reasonable profit exceed the maximum price.
The issue is which costs and what level of reasonable profit will be recognized. The calculation must account for crude oil purchase costs, transportation and insurance, as well as refining and distribution costs. Costs for products sold domestically, excluding export volumes, must be calculated separately, and differences in how refiners value inventory and handle accounting could lead to disagreements during the final settlement. The government is working on the settlement with the aim of disbursing compensation by the end of the year.
Export restrictions are also a burden. Since the maximum-price system was introduced, the government has limited monthly exports of gasoline, diesel and kerosene to no more than 100% of the volume in the same month a year earlier, while requiring domestic shipments to remain at least 90% of the level in the same month a year earlier. The measures are intended to prioritize domestic supply, but they restrict refiners’ ability to increase exports of products commanding high international prices.
The refining industry is reportedly asking the government to ease export restrictions as long as domestic supply and demand are not disrupted. The Ministry of Trade, Industry and Energy says it will consult with the industry and consider ways to manage export volumes.
The fiscal burden of keeping the maximum-price system in place for an extended period is also seen as a variable. The government has earmarked 1.4497 trillion won in next year’s budget proposal to fund compensation for losses in the fourth quarter of this year.
An industry source said, "How much of the cost increases refiners can have recognized while domestic supply prices remain unchanged will affect each refiner’s profitability."

[email protected] Kim Mi-hee Reporter