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With crude oil prices unlikely to go below $100 a barrel in the near future, the oil sector is gearing up for a rough ride this fiscal.
Higher subsidy payouts
While the trio of IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation will see fuel losses hit the roof, the upstream sector led by Oil and Natural Gas Corporation is going to feel the heat of higher subsidy payouts. Present estimates on losses incurred on sale of diesel, cooking gas and kerosene are around Rs 1,80,000 crore.
From ONGC's point of view, this will mean coughing up Rs 60,000 crore (with contributions coming in from Oil India and GAIL) as part of its one-third compensation formula to the three refiners.
In the process, this would be its highest outgo, even more than the Rs 32,000 crore forked out in crisis-ridden 2008-09, and Rs 26,000 crore last fiscal.
Naturally, this is not going to be the best piece of news for those investors waiting for ONGC's forthcoming public offer scheduled in July-August this year. Should crude prices continue to remain as unrelenting, and there is no indication to suggest the contrary, there is a strong chance of the FPO being deferred. This was the prime reason why it was also put on hold for IOC last fiscal.
What could, however, go in ONGC's favour is that there has been no clear-cut compensation formula that has been put in place for the current year.
Traditionally, the upstream sector has chipped in with one-thirds but it remains to be seen if this can continue through 2011-12 if crude prices remain at over $100/bbl.
Petrol price hike
The oil sector believes the only way out of this tangle is to increase fuel prices. The irony is that IOC, HPCL and BPCL are already losing over Rs 7/litre on petrol, which is a deregulated fuel, but cannot increase its price.
“It's all very nice to say that we have the freedom to hike petrol prices but, in reality, it's the Government that has the last say,” an executive told Business Line .
Since June last year, petrol has become dearer by nearly Rs 10/litre but its consumption pattern is up by 14 per cent, a clear indication that people are willing to pay more.
Going by that logic, there is no reason why the market cannot absorb another increase, even if it is Rs 7/litre. “When people are willing to pay Rs 200 for a movie at a multiplex, there is no reason why they should get away paying less for an essential commodity like petrol,” the executive added.
In reality, petrol is actually the least of the refiners' problems considering that it accounts for a minuscule percentage of their total fuel losses. The real worry is diesel whose losses (estimated at Rs 18/litre) are going hand-in-hand with rampant consumption across sectors. A price hike of Rs 3/litre is inevitable in May-June but this will hardly help unless this is accompanied by a reduction in duties.
With IOC, HPCL and BPCL earmarking ‘mandatory investments' of Rs 2,00,000 crore over the next five years, the biggest challenge is to generate enough money to keep their projects going.
For the moment, it looks as if the only way out is to borrow more which will only increase their interest burden. “The other option is to pray that crude prices just plummet to under $50/bbl except that this would be wishful thinking,” an official said.
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