The Hindu Business Line : With time running out, oil refiners await compensation package

Mumbai, March 11 With less than three weeks to go before the fiscal year draws to a close, the navratna trio of Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are hoping that they get a part of the compensation package sought from the Centre.

The reimbursement wish-list comprises three major components: interest on borrowings, which works out to over Rs 10,000 crore for the oil majors; forex losses sustained on imports thanks largely to the roller-coaster ride of the rupee vis-À-vis the dollar; and, finally, costs of carrying expensive crude stocks bought at the time it was over $100 a barrel.

“We are unlikely to be compensated for losses relating to foreign exchange and crude stocks but do believe that we have a strong case for interest costs because borrowings were made before the issue of oil bonds,” top sources told Business Line.

In fact, the first lot of these bonds only came towards the third week of December 2008 when the three companies were in a precarious financial position.

By the end of the second quarter, losses (also termed under-recoveries) on sale of petrol, diesel, cooking gas and kerosene had reached nearly Rs 500 crore daily. Prices of petrol and diesel were hiked marginally thereafter but the oil companies had been borrowing heavily to keep afloat and almost reached their combined limits of Rs 140,000 crore.

To make a difference

If the Centre does not make good the interest costs, HPCL and BPCL would be the worst affected and are actually likely to report a net loss for 2008-09.

“This compensation of Rs 4,000-crore plus for the two companies combined could actually make a huge difference,” sources said. Both are expected to post turnovers in the region of Rs 150,000 crore each but net profits would be barely Rs 150-200 crore, assuming the interest costs are reimbursed.

IOC is apparently better off because of other revenue streams that have propped up its bottomline. In addition, the Fortune 500 company had recently sold a sizeable number of oil bonds at a premium.

“By the end of the day, though, even IOC’s net profit in the background of a Rs 280,000 crore plus turnover will not be anything much to write home about,” sources said.

Both IOC and BPCL had reported net profits in the third quarter (thanks largely to accounting of the oil bonds) and even though HPCL was in the red, it could derive solace from the fact that all three had reported losses for the April-December period.

Wrong timing

The biggest concern for the oil majors is that the timing for a compensation package is all wrong as it is happening when the country is heading for the polls and Cabinet is not likely to take any key decisions.

Further, valuable time will be lost in the months leading to the formation of a new Government as the process of scouring for allies will be long and drawn out. Should this happen, none of the components of the compensation package will be reimbursed which means that 2008-09 would be a fiscal best forgotten from the oil companies’ point of view.

The Finance Ministry has already made it clear that no more oil bonds will be issued during the fourth quarter. Thus far, Rs 65,000 crore has been issued to IOC, HPCL and BPCL as part-compensation for losses incurred on selling subsidised fuels.

The situation is much better now though losses on cooking gas (LPG) have climbed to Rs 120 a cylinder and petrol is inching towards Re 1/litre. The silver lining in the cloud is diesel where profits are over Rs 4/litre but, as sources said, there is no telling when its price will be slashed again.

With crude prices having fallen to levels of $40 a barrel, the subsidy package (in the form of discounts on crude and petro-products) from Oil and Natural Gas Corporation (ONGC), Oil India and GAIL (India) has ceased for this quarter.

“It would be unrealistic for the refiners to expect these sops because ONGC and GAIL are already finding the going tough in these times of depressed crude and product prices,” sources said. The two upstream companies had subsidised their downstream counterparts to the tune of Rs 32,000 crore in the first three quarters.

The worrying news for IOC, HPCL and BPCL is that there is no telling when prices globally will start rising again. LPG is already showing signs of a climb which raises a big question mark on the timing of its recent price cut by Rs 25 a cylinder.