The Hindu Business Line : IOC refining margins may remain negative in Nov

Oil route
Traditionally, refining operations contributed 1/3rd of IOC profits.
For the last 2 years, it absorbed a substantial part of marketing losses.

Pratim Ranjan Bose

Kolkata, Nov. 13 Despite a fall in crude prices to manageable levels, drastic erosion in refining operations has come in the way of IndianOil breaking-even.

While fall in refining margins is a global phenomenon, for IOC the problem is aggravated by a huge 20-21 days crude oil inventory including approximately 10 days of system inventory lying in the pipeline and intermediate storage tanks.

Loss path

Having posted a gross refining margin of $4.5 a barrel in the second quarter, IOC has hardly managed to post a positive gross refining margin in October. Refining operations became loss-making in November.

Considering that the company uses monthly historic price average for calculation of gross refining margin coupled with a large system inventory, the crude IOC is now using for refining may have been purchased sometime in September-October.

“Refining margins may remain negative in November. If crude prices stabilise at these levels, refining operations may come back in the black in December,” a company source told Business Line.

“Traditionally, refining operations contributed one third of the company’s profits. For the last two years, refining margin absorbed a substantial part of the marketing losses incurred by the company. Today it is the same refining operation which eats into the marketing profits generated on sale of auto fuel,” the source said.

As on November 1, IOC was posting a profit of Rs 4 a litre on sale of petrol, a marginal 96 paise loss on diesel. Sale of kerosene and LPG, however, continues to be heavily loss-making. The company is currently losing Rs 22 a litre on kerosene and Rs 340 a cylinder on sale of domestic LPG.

Loan restructuring

Meanwhile, IOC may either have to fork out substantially higher interest rate for its $800-900 million short-term (six months) foreign exchange borrowings or may have to convert part of them in rupee loans.

According to sources, the cost of these loans (including forward cover) may go up from 6.5 per cent to approximately 9 per cent if rolled over by the lenders. However, chances are high that the company will convert parts of them in rupee loan.

In the domestic market, the short term borrowing cost has come down from 14-15 per cent to 12 per cent in last one month.

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