Govt reaffirms cost-based formula for oil price cap losses as first settlement nears

The government reaffirmed Friday that it will calculate loss compensation for domestic refiners under the oil price cap regime using a cost-based standard, and said it plans to publicly disclose the loss figures for the first time by the end of this month or early next month.

The government and the refining industry have been at odds over the calculation method, and the dispute is expected to drag on before a final settlement is reached.

Yang Ki-wook, director general for industrial resources security at South Korea's Ministry of Trade, Industry and Resources, said at a video briefing on the oil price cap Friday that the cost-based standard had been clearly stated since the ministry's official notice in March and had been fully explained to the refining industry.

On the scale of the first round of loss compensation — covering March 13 through June 30 — Yang said the amount "can be sufficiently covered within the reserve fund based on the materials reviewed so far."

The government set aside a reserve of 4.2 trillion won ($3.15 billion) on the assumption the oil price cap would run for six months. An additional 1.4497 trillion won was included in next year's budget to account for the regime continuing through the fourth quarter of this year.

The refining industry has argued that losses should be calculated based on the Singapore international petroleum product price, known as MOPS. Refiners contend they are entitled to compensation for opportunity costs, since they are selling domestically at the government-set ceiling price volumes they could otherwise export at international market prices.

The government rejected that argument, saying it runs counter to the purpose of the price cap.

"If we settle losses based on Singapore international prices, we would have to ask ourselves whether there is any point in implementing a domestic price cap and having the government compensate for losses at all," Yang said.

Yang added that refiners earned operating profit in the trillions of won through exports in the first three quarters of this year, and applying the same international price standard to domestic sales would contradict the purpose of the price cap. "Loss compensation ultimately draws on taxpayer money as fiscal support, so we have no choice but to apply the cost-based standard," he said.

The government expects the gap between the loss figures submitted by refiners and its own final settlement figures to be small.

"The settlement data submitted by the refiners were also prepared in accordance with the cost-based guidelines the government initially provided," Yang said. "There should not be a significant difference between the amounts submitted by the refiners and the government's final settlement figures."

The government plans to finalize the loss figures for the March 13–June 30 period, notify the refiners, and release the figures publicly by the end of this month or early next month.

The oil price cap settlement committee is currently reviewing the loss figures, and the final compensation amount will be confirmed after consultations among related ministries.

The government intends to pay the compensation within the year, though the timeline could slip to next year if refiners file objections.