The Hindu Business Line : Petroleum products pricing — Oil marketing firms' balance sheets may be under strain in Q3 too

WITH time running out for reporting their third quarterly results, oil marketing companies (OMCs) may continue to be saddled with botched balance sheets as there has been little action from the Government on the petroleum products pricing issue.

While a decision on raising product prices continues to be on hold because of political considerations - mainly the upcoming Assembly elections in some major States - partial compensation to the OMCs through the issue of oil bonds has also been delayed because of differing perceptions between the Petroleum and Finance Ministries.

According to oil industry sources, OMCs such as Indian Oil Corporation, Bharat Petroleum, Hindustan Petroleum and IBP are likely to suffer huge under-recoveries in 2005-06, much higher than what they incurred in 2004-05. The under-recoveries are mainly on account of sale of petroleum products below cost price.

The OMCs suffered losses for the first time ever in the first quarter of 2005-06. Hindustan Petroleum, Bharat Petroleum and IBP continued to suffer losses during the first half of the fiscal despite the contribution from the upstream companies. The projected under-recoveries for 2005-06 are Rs 38,154 crore against Rs 20,146 crore in 2004-05. The projected gross under-recoveries for LPG and kerosene for 2005-06 are Rs 23,236 crore (Rs 17,842 crore), and those for petrol and diesel are likely to be Rs 14,918 crore (Rs 2,304 crore). Industry sources said the collective burden of Rs 38,154 crore on the oil companies was far too heavy and was eroding the capacity to generate internal resources for investments in future projects.

On the issue of the oil bonds, meant to partially mitigate the subsidy burden, the Petroleum Ministry recently requested the Finance Ministry to re-examine the Rs 5,750-crore oil bond structure proposed by the latter. A Petroleum Ministry official said, "We are hoping the Finance Ministry would take a decision soon. We have requested it to consider the bond structure based on our proposal." The Finance Ministry is in discussion with the Reserve Bank of India on the oil bonds structure.

To cover the under-recoveries of the oil firms from the sale of petroleum products, the Government in December 2005 took parliamentary approval through the second batch of supplementary demands for grants for Rs 9,080 crore, of which Rs 5,750 crore was to be allocated to OMCs through oil bonds. The small size of the bonds proposed by the Finance Ministry, coupled with the riders, was of little help to the companies, the official said.

According to the structure proposed by the Finance Ministry, the bonds would carry zero interest. Further, they can be offloaded only in the secondary market and not in the primary market. The tenure of the bond is five years. Another stipulation is that in the first three years, the companies can offload only Rs 2,000 crore and another Rs 2,000 crore in the next two years and the remaining Rs 1,750 crore in the last tranche. This was not acceptable to the Petroleum Ministry.