With no diesel price hike, refiners face huge cost burden

Murali Gopalan Mumbai | Updated on January 07, 2011

With no price hike in diesel expected this fiscal, IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation will end up borrowing more and increasing the cost burden in their books.

Diesel losses are already Rs 7 a litre and account for nearly Rs 25,000 crore of the Rs 41,000-crore (losses) projected for the period between October and March 2011. “Even a price increase of Rs 2 would have helped at least from the viewpoint of cutting losses,” an oil sector official said.

Cooking gas

Cooking gas also continues to be an area of concern with its losses inching towards the Rs 400 a cylinder mark. This is even more than the present retail price of Rs 350 but a price increase looks unlikely.

While the Centre is in a bind with the spectre of food inflation looming large, the oil refining trio may end up doing a rethink on big-ticket investments. While each of them has a new refinery due for commissioning soon, there are other big spends in the form of pipelines, terminals and bottling plants.

In addition, the companies are keen on an aggressive play in areas such as petrochemicals, gas and exploration which will call for substantial investments. What requires urgent attention is replacement of the existing creaky infrastructure.

“The show must go on and the only way out is to borrow more. The interest burden is going to be heavy but there is really no way out. We just cannot stop making these investments,” the official added.

IOC, HPCL and BPCL have already borrowed well over Rs 1.1 lakh crore simply because there is not enough internal cash generation because of the huge fuel losses. It looked as if 2008-09 was the worst year when crude prices touched $147 a barrel but the coming fiscal is expected to see it stay closer to the $100 level or even breach it on a strong US recovery.

Things looked rosy last June when the Centre announced its intent to deregulate prices beginning with petrol and a commitment to freeing diesel in the medium term. The refiners were jubilant but this was short-lived with crude playing the spoilsport.

Compensation package

With the Oil and Natural Gas Corporation's follow-on public offering scheduled in March, the Centre has constantly been driving home the point that the upstream companies' (ONGC, Gail and Oil India) compensation package will be capped at a third of the refiners' fuel losses.

“Investors are obviously going to be concerned if there is no clarity on ONGC's subsidy support formula. This way, they will be reassured that there will be no vacillation by the Centre,” sources said. It remains to be seen, of course, what kind of a compensation mechanism will be place in 2011-12 especially with the Finance Ministry loathe to dole out more to the hapless refiners.

Published on January 07, 2011

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