"Cost-Based Compensation" vs "Product Price Standard"... Government and Refiners Remain at Odds Over Loss Compensation

Fifth Maximum Petroleum Price Frozen Again
Debate Intensifies Over Compensation Criteria for Refiners
Maximum Price Settlement Committee to Be Formed This Month

As the government once again freezes the maximum price of petroleum, tensions are expected to rise between the government and the industry over the standards for calculating losses. Industry insiders are concerned that, despite the government's promise to compensate for losses, if the authorities stick to the "cost calculation method," actual losses may not be fully reimbursed.

On the 5th, fuel prices were displayed at a gas station in Seoul. Photo by Yonhap News

According to the Ministry of Trade, Industry and Energy on May 8, the fifth round of maximum prices, which will be applied for two weeks starting from this day, are set at 1,934 won per liter for gasoline, 1,923 won for diesel, and 1,530 won for kerosene. The government explained that this measure was taken in light of the continued volatility in international oil prices and the fact that rising petroleum prices are driving up consumer prices and logistics costs.

Within the industry, as the maximum price system enters its second month, there is a growing sense of unease that the cumulative losses have now reached the trillion-won range, making it unlikely that the full amount will be compensated. An industry representative stated, "Although the government has promised loss compensation, if the compensation standard is set based on production costs, losses arising from the gap with market prices may not be fully reflected. Given that companies are already facing additional pressures from rising product prices and exchange rates, if the compensation amount falls short of expectations, the burden on the industry is bound to be significant."

As the gap in perspectives regarding the loss compensation standard remains unresolved, a tug-of-war between the government and the industry is expected to continue for some time. The government maintains that the compensation amount should be calculated based on production costs. Each refiner calculates its own costs using financial statements and income statements, submits them to the government, and then, after verification by an accounting firm, the Maximum Price Settlement Committee will review and finalize the amount.

On the other hand, the refining industry argues that the compensation amount should be calculated based on the actual purchase prices paid by companies. They point out that, because gasoline, kerosene, and diesel are all produced simultaneously in a single process—a so-called "joint product" structure—it is difficult to calculate the cost for just one specific product.

If, following the refining industry's logic, the Singapore Mean of Platts Singapore (MOPS)—the benchmark price used for supplying gasoline and diesel—is adopted as the standard and converted to a per-liter basis, then applied to the various scenarios under the maximum price system, it is projected that refiners' losses will far exceed 3.5 trillion won. This surpasses 80% of the government's allocated emergency reserve fund of approximately 4.2 trillion won.

There are also calls to reflect not only production costs but also the actual burden from the rising exchange rate when calculating losses. An industry representative said, "Refiners have to pay for crude oil in dollars, so the impact of the exchange rate increase is considerable. Due to price controls, it is impossible to avoid large-scale foreign exchange losses and other financial losses."

The government and the industry plan to continue discussions on the standards and scale of loss compensation through the Maximum Price Settlement Committee and other bodies, which will be convened this month. Another industry official commented, "We are only just beginning discussions with the government on the compensation standards," adding, "We will coordinate the standards in consultation with accounting firms and other parties."

This content was produced with the assistance of AI translation services.