The Hindu Business Line : PSU oil retailers hopeful of better times post-Budget

New Delhi/Mumbai, July 5 The auto fuel price hike was music to the ears of the three public sector oil marketing companies (OMCs) though they still believe that it is only the “tip of the iceberg” and that the Union Budget will make some major policy announcements.

If the Economic Survey 2008-09 is any indicator, deregulation of petrol and diesel prices is the way forward coupled with restricting subsidy on domestic LPG while phasing out kerosene supply subsidy.

Despite the price hike, the OMCs may face a revenue loss of about Rs 57,000 crore this fiscal (assuming that the Indian crude oil basket averages $70 a barrel) on the four products – petrol, diesel, PDS kerosene and domestic LPG.

Subsidy sharing formula

This has resulted in a great degree of uncertainty on the subsidy sharing mechanism that is yet to be worked out by the Government. Industry sources said it was still unclear if the kerosene and LPG subsidies (Rs 30,000 crore estimated for 2009-10) would be transferred to the Budget so that the OMCs are spared this burden.

The Finance Ministry is reportedly in favour of a formula where up to one-third of the losses on petrol and diesel will be borne by the upstream companies (ONGC and Oil India) and GAIL with the balance to be raised from the market in the form of price hikes.

This will, of course, depend on crude price movements and so long as they are under $75 a barrel, the going will be smooth. The industry expects the Budget to address the way forward when prices shoot beyond this level.

The recent price hike has raised the hackles of political parties. While defending the increase, the Petroleum Minister, Mr Murli Deora, told Business Line, “From the beginning of 2004, international oil prices started rising steeply besides witnessing high volatility. To protect the consumer from this inflationary impact, the Government has been modulating the retail prices of petrol, diesel, PDS kerosene, and domestic LPG.”

However, this has caused a huge fiscal burden on the Government. “Due to the steep rise in oil prices since 2004-05, the under-recoveries of the OMCs have been mounting,” he said. This caused them to borrow heavily. As compared to total borrowings of Rs 66,900 crore as of March 2008, these ballooned to Rs 1.07 lakh crore on December 31, 2008, before falling again to Rs 88,900 crore in March 2009, consequent to the fall in global oil prices and issue/ liquidation of oil bonds.

In 2008-09, the OMCs’ interest burden also increased to Rs 8,201 crore against Rs 3,016 crore during the previous year, affecting their profitability.

“As on July 1, the OMCs were projected to suffer monthly under-recoveries of Rs 4,870 crore on the four products. To cover this and maintain the financial health of the navratna PSUs, the retail prices were required to be increased. This will only result in reducing their losses,” he said.

Related Stories:
Petrol price raised by Rs 4 & diesel Rs 2; cooking fuels spared
Losses on subsidised fuels may touch Rs 40,000 cr
Oil sector looks to free pricing of petrol, diesel
Oil bonds for Rs 10,000 cr issued to 3 oil marketing cos

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