The Hindu Business Line : High crude prices put pressure on oil companies

New Delhi, May 9 The Government may be pushed to revisit the existing multi-pronged strategy to contain the adverse impact of the high international oil prices on the public sector oil marketing companies (OMCs), if the persistent rise in crude oil prices continues.

The Indian crude basket on Thursday was at a new high of $117.83 a barrel.

Every dollar increase in the Indian crude basket widens the gross revenue loss being incurred by the OMCs for selling the petroleum products at a subsidised rate.

According to industry analysts, the exchange rate gains of higher refining margins will be negated to a large extent by higher under-recoveries. And any depreciation of the rupee will further impact the refineries profitability as they would have to fork out more rupees for every dollar.

The gross refining margin (GRM) is the profit which refiners get for processing crude into products.

IOC’s gross refinery margin for the April-December period of 2007-08 stood at $9.10 a barrel against $3.64 a barrel in the corresponding period previous fiscal. Hindustan Petroleum Corporation’s GRM for the two refineries was averaging around $6 a barrel for 2007-08.

In order to lessen the impact of scaling crude prices on their profitability, the OMCs are expecting the Government to work out a mechanism.

Currently, the Government follows the principle of ‘equitable burden sharing’ – issue of oil bonds, upstream/refinery discounts, and minimal price increase.

Industry sources told Business Line that with borrowings increasing every month, the companies are looking at cash compensation from the Government, including bonds and duty rationalisation for future. The OMCs have already taken up the case with Petroleum Ministry and Finance Ministry.

The Government has issued oil bonds to the OMCs worth Rs 20,333 crore and upstream companies have contributed Rs 15,873 crore to partially compensate the under-recoveries of OMCs during the April-December period of fiscal 2007-08. For the corresponding period, the impact absorbed by the OMCs after the issue of bonds and subsidies by the upstream is likely to be Rs 11,413 crore. The OMCs are waiting for the last tranche of oil bonds.

With continued volatility in crude prices, the revenue losses suffered by the three OMCs – Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation - combined were estimated around Rs 475-500 crore a day. The under-recovery on sale of petrol stood at Rs 14 a litre, diesel Rs 21 a litre, kerosene Rs 28.72 a litre and LPG Rs 306 a cylinder.

The gross under-recoveries of the OMCs for 2007-08 were estimated to be Rs 77,303 crore. With the crude basket continuing above the $100-a-barrel mark, projected revenue loss is about Rs 1,50,000 crore on fuel sales this fiscal.

The Government had increased the retail selling price of petrol and diesel in February when the Indian basket was averaging at $76.57 a barrel (April 2007-Febraury 14, 2008). The retail price was revised effective midnight of February 14 when the basket was at $92.07 a barrel.

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