This was the worst ever year for the oil refining trio of IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. And with no remedial policy measures in place, things could get even trickier in the future.

There was no change in the all-too familiar script of losses piling up on sale of subsidised fuels such as diesel, cooking gas and kerosene. As is the case each year, the Government was late in squaring these up with the refiners with the result that borrowings have hit the roof. Between IOC, HPCL and BPCL, the debt burden on their books is over Rs 1.4 lakh crore. Add the interest levy to this figure and the picture only gets scarier.

Biggest fear

Within oil industry circles, the biggest fear is that there just does not seem to be any solution coming in from the Government. “Decision making has come to a stop with the daily ruckus in Parliament. We have no option but to fend for ourselves now,” an official said.

With cash flow being the biggest challenge in the short term, the oil majors are in no mood to oblige when it comes to issues like payment of advance tax or the mandatory interim dividend to the Government. “It is almost laughable to think of these things when all of us are virtually gasping for survival,” the official added.

If high crude prices are a cause for concern, especially with the outlook for the future continuing to be grim, the falling rupee has only added to the refiners' woes. Little wonder that they feel the period of 2008-09 was almost tame in comparison. Though this is better remembered as the year when crude prices galloped away to nearly $150 a barrel, the fall was as steep and welcome.

By the second half of 2008-09, crude was back to a more manageable $40/bbl and the oil majors could breathe a lot easier. But the break was brief and deceptive with prices in the following fiscal quickly climbing back to the over $80/bbl level. Today, the unanimous opinion within industry circles is that crude will stay at the $100/bbl mark for the near future which means that the present status quo will continue.

What then is the best bet going forward? Various expert committees over the years have agreed that diesel and cooking gas prices should be out of the administered pricing system which simply means eliminating their subsidies. This is easier said than done especially when inflation is already at uncomfortable levels. And with the Government facing its worst ever political crisis in recent times, it is just in no mood to stoke public anger further.

Big-ticket investments

As a result, the biggest losers are IOC, HPCL and BPCL which desperately need money for big-ticket investments estimated to be around Rs 2 lakh crore over the nest four years. For this to happen, they need to make good their losses on diesel, cooking gas and kerosene which can only come from their biggest shareholder, the Government.

In the process, all they can do is wait and watch even as the time bomb is merrily ticking away. The old-timers known only too well that the permutations will kick off during the last quarter of 2011-12. This only means that ONGC (Oil and Natural Gas Corporation) and its upstream allies – Oil India and Gail India – will be asked to cough up more than their prescribed share of bearing a third of their downstream counterparts' losses.

The Government will try and cap its share which means the refiners will have no option but to play out their part too in absorbing a part of the losses. Not the healthiest of solutions and something that will only drive IOC, HPCL and BPCL deeper into the red.

gmurali@thehindu.co.in

(This article was published on December 31, 2011)
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