The Hindu Business Line : Oil companies on slippery wicket

Mumbai, Nov. 20 Crude prices may have fallen to $55 a barrel but this has been of little help to the Big 3 — IndianOil (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) — whose bottomlines are still under pressure this fiscal.

The navratna trio had reported combined losses of over Rs 12,000 crore in the second quarter and are now up against the prospects of low refining margins with the rapid fall in crude prices in the last 2-3 months.

Further, the three companies are still bogged down by carrying costs of crude inventories, valued at over $70 a barrel, which were bought before prices fell.

“We are of the view that these stocks will continue to be sold at a loss till mid-December,” an oil industry executive said.

What is “particularly scary”, according to him, is that combined bank borrowings of these PSUs have exceeded Rs 1,20,000 crore. Of this, IOC accounts for roughly half the burden with the other two oil majors taking up nearly Rs 30,000 crore each. The dramatic fall in crude prices from the dizzy levels of $147 a barrel has helped from the viewpoint of reduced borrowings now but the dues of the recent past have to be squared up.

Years to clear dues

Top executives of these public sector oil companies said that it could take them some years before this mind-boggling figure is wiped out from their books.

“The damage has been done and it is of little help that bonds are being issued to make up for the losses incurred on selling fuels at subsidised prices,” they added.

These four fuels are petrol, diesel, cooking gas (LPG) and kerosene, which have burnt a huge hole in the books of the oil majors. When crude prices had peaked, projected losses (or under-recoveries) because of these subsidies were nearly Rs 2,50,000 crore. Since then, they have fallen to a more manageable Rs 1,20,000 crore.

Till a few months ago, the three PSUs faced a peculiar challenge in coping with an overwhelming demand for diesel spurred largely by the power crisis and greater use of generators.

However, at a time when they are finally making profits on sale of diesel, end-users are opting for naphtha, global prices of which have crashed to levels lower than diesel, making it a more attractive option.

Help from refining cos

There could be further bad news in store for IOC, HPCL and BPCL. According to a subsidy-sharing formula worked out by the Government, one-third of their losses on under-recoveries are made up largely by the cash-rich Oil and Natural Gas Corporation (ONGC) with a little support from Oil India (OIL) and Gas Authority of India (Gail).

In fact, these three companies chipped in with Rs 14,000 crore for the July-September quarter (with ONGC accounting for the bulk, at Rs 12,000 crore plus) but are not likely to continue doing this when crude prices have fallen so dramatically.

“How can we expect ONGC to support us through discounts on crude when it can hardly reap any profit at this level?” an oil industry official asked. Indications are that the exploration major has requested the Ministry to spare it of this exercise for the last two quarters of this fiscal.

It is possibly in this context that the three refining companies are hoping that there will be no downward revision in fuel prices, though speculation is rife that diesel will see a marginal cut next month.

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