The Hindu Business Line : Public sector oil marketing companies facing cash crunch

Kolkata, April 30 The public sector oil marketing companies are fast running out of cash (working capital) needed to keep their operations going, say sources in these companies.

The cash crunch is adding a new dimension to the problem of under-recoveries in the domestic sale of petroleum products that these oil PSUs — IndianOil (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — suffer in the backdrop of relentless rise in crude prices. Indeed, these sources go so far as to say, “2008-09 to be the most difficult year to survive”.

“It’s more than two years now that we are borrowing from banks to meet the working capital requirement. As the gap between the expenditure and realisation is ever increasing, every year our borrowings are mounting. If the situation continues for another three-four months we may even find it difficult to raise finances to meet the cash requirements,” said a senior official in one of the companies.

Oil bonds

The crux of the problem lies in the Government’s financial solution (oil bonds) to the mounting gap between (43-57 per cent) what it costs to produce petroleum products and the price at which the Government allows some of these to be sold to consumers by the oil companies. According to the existing norms, companies can sell only a fraction of these long-term bonds in the secondary market. Naturally, companies turn to banks to bridge the gap. But banks do not extend 100 per cent refinance on the value of these bonds offered as collateral.

The PSU oil marketing companies have been drawing on their existing cash credit limits with these banks and with successive years of under-recoveries these are getting drawn at a rate there is little head room available now.

The results are telling on the balance sheet. As on March 31, 2008, IOC’s total borrowings are reported to be around Rs 35,400 crore, up by around 30 per cent from Rs 27,000 crore in 2006-07. HPCL has recorded nearly 60 per cent increase in borrowings to Rs 16,000 crore. BPCL’s borrowings have shot up by close to 40 per cent to Rs 15,000 crore.

Impact on new projects

Senior-level officials admit that unless there is either a dramatic meltdown in crude oil prices or the Union Government comes out with a revised mechanism ensuring cash flows into the system, the PSU refining and marketing companies may have to go slow on their future investments.

While projects that are already tied up and are under implementation may not be immediately affected, those yet to be firmed up may be delayed.

The average price of India basket crude has increased from $55.72 a barrel in 2005-06, $62.46 a barrel in 2006-07 to $79.25 in 2007-08. The average price in April 2008 is $105 a barrel.

“The financial condition of PSU marketing companies may deteriorate further in 2008-09 and the future projects may be affected,” feels an analyst with Angel Broking.

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