The Hindu Business Line : Oil cos keep their fingers crossed for 2009

Mumbai, Dec. 30 This is a year best forgotten for the Navaratna trio of Indian Oil (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL).

While December 31 would have the New Year revellers scream from the rooftops, it marks the end of another sombre quarterly period for these companies. It means another round of combined losses estimated at Rs 12,000 crore, which would bring the total for the three quarters to over Rs 25,000 crore for IOC, HPCL and BPCL.

The silver lining in the cloud is that the next three months, which will bring the curtains down on 2008-09, could see marginal profits but this will not be enough to offset the losses accumulated thus far. As sources say, it is hardly something to be proud of because it would be for the first time, since they were nationalised, that these oil companies would be reporting losses for an entire fiscal.

Not enough cash

Things were actually much worse in the first half of 2008-09 when the spectre of bankruptcy loomed large for IOC, HPCL and BPCL. There was just not enough money for the following month and even top executives, who were worried to death at one stage, resorted to grim humour instead. “If there is no money tomorrow, I will just put a huge lock outside and ask people to go home,” one of them told Business Line.

The situation was rapidly getting out of control. With no Government intervention coming by way of the traditional oil bonds or a price hike, some of the companies resorted to the next best option – fuel rationing.

Consumers were told by distributors that there would be no more fresh cooking gas (LPG) connections. Chennai, Nashik, Pune and parts of Mumbai began reporting diesel shortages as car and two-wheeler owners began panicking.

“What do you expect us to do when there is no cash to run our business? Nobody wants to hurt the customer but we are in dire straits,” representatives of these oil companies said. Fortunately, the problem did not last too long and supplies were restored though it was costing them heavily. The companies had also been borrowing from banks and the result of that is visible today. Estimates suggest that IOC, BPCL and HPCL have borrowed almost Rs 130,000 crore which is precariously close to their combined limits of Rs 140,000 crore. Of course, the bonds came on time but the interest burden on these borrowings is something that they will have to bear for some years.

The crude price spiral then, compared to the more manageable levels of $40 today (and expected to rise in the coming weeks thanks to the recent spate of bombings in West Asia), was almost frightening at $147 a barrel. Losses incurred on sale of subsidised fuels such as petrol, diesel, LPG and kerosene were skyrocketing to projections of Rs 250,000 crore plus annually.

A financial tsunami

What was even more bizarre was the fact that exploration companies such as the Oil and Natural Gas Corporation (ONGC) (with a little help from Oil India and GAIL India ) could not help out as before. The Government, according to its subsidy formula, had directed ONGC to subsidise one-thirds of the losses incurred by its refining counterparts. The only problem at this juncture was that one-thirds of the estimated Rs 250,000 crore was close to Rs 85,000 crore, which was more than ONGC’s turnover!

“This was truly a financial tsunami and we were convinced that the time to shut down operations in phases had come,” an oil industry executive recalls. The Government finally decided to go in for a hike in prices of petrol and diesel (by Rs 5 and Rs 3 apiece) but this was a case of too little, too late. The oil companies would have been happier with a three-fold increase but knew well that this was completely inconceivable given the political realities of the situation.

It was also time to revisit the oil bonds to compensate for losses incurred on selling subsidised fuels. The figure computed for January to September was Rs 65,000 crore and two rounds of bonds totalling Rs 45,000 crore have been issued with the final one due in end-January.

Airlines’ fuel dues mount

The oil companies were also up against another wall in the form of dues from airline companies for aviation turbine fuel (ATF) supplies. When they threatened to cut off future supplies, the Ministry of Civil Aviation stepped into the picture and, along with the Petroleum Ministry, asked the oil PSUs to grant easier credit and longer repayment periods.

Compared to projections of Rs 250,000 crore for losses on sale of subsidised fuels, the dues from the airlines werebarely Rs 3,000 crore but the fact that nobody took up their cause angered the management of the oil companies. “Why is it that we are the fall guys all the time?” they asked.

Today, crude is cheaper but, in the process, ONGC is making lesser money and will, therefore, no longer be part of the one-thirds subsidy formula. IOC, HPCL and BPCL have also realised that their monthly crude bills have also fallen drastically to $2.5 billion from $5 billion barely three months ago. This only means that they will be stuck with the oil bonds longer because encashing them against crude purchases will take many months more.

Falling crude prices have also led to these oil majors carrying inventories which were bought at levels of nearly $100 a barrel. Depleting these stocks comes at a price which will only compound their losses in the final quarter. No wonder, most of them are hoping that crude does not get any cheaper because it is an added burden for them.

The three oil companies will be hoping that 2009-10 is a better year when they can focus on new projects and work towards the ultimate objective of oil security.