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It takes 60 days for IndianOil Corporation Ltd (IOC) to buy crude oil, turn it into fuel, and deliver it to the consumer, for which it has to pay a heavy price, thanks to its refineries’ location disadvantage.
The long process results in IOC incurring cash losses, said an official, while not disclosing the amount. The amount of losses can be gauged from the fact that crude oil, which IOC bought in November 2014 at $70 a barrel, is being processed now, when prices are below $50 a barrel.
The refiner, which ideally should be at an advantage with the steep fall in crude oil prices, finds itself at a disadvantage vis-a-vis its private sector counterparts such as Reliance Industries, because of the time it takes from procuring to delivering.
Compared with IOC, Reliance Industries, which has two refineries with a combined capacity of 60 million tonnes a year, takes 30 days to complete the entire process.
Refineries in hinterlandA senior official said IOC, which has a group (including subsidiaries) refining capacity of about 65.2 mt a year, has most its refineries in the hinterland that adds time to the entire process after which the company sells the fuels in the domestic market. On the other hand, Reliance has coastal refineries and exports the products soon after processing.
The average price at which Indian refiners sourced their crude in the October-December quarter was $75.17 a barrel. The Indian crude oil basket on January 19 was at $45.76 a barrel.
Besides, IOC is still not doing any hedging on crude oil purchases, as the risks involved are higher, another official said, adding the public sector company does hedge on currency.
“Though the subsidy on liquefied petroleum gas and kerosene is a concern for IOC, at present, the inventory loss is more significant. Besides, the subsidy is reimbursed by the Government, but the company has to tackle cash loss by itself,” the official added. A decision on the third quarter of 2014-15 subsidy reimbursement is expected by the end of this month.
In fact, the Comptroller and Auditor General of India, in its report on Pricing Mechanism of Major Petroleum Products in Central Public Sector Oil Marketing Companies, quoted the Ministry of Petroleum and Natural Gas as acknowledging that PSU refineries suffered from inherent disadvantage of location, size and vintage.
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