No fuel price revision between November 2021-March 2022 impacts oil PSUs’ revenues

The freeze on petrol and diesel price revision by oil marketing companies (OMCs) for over four months, during November 2021-March 2022, has adversely impacted revenues, with refiners IOCL, BPCL and HPCL incurring an average daily loss of around $71 million alone in the first three weeks of March. Auto fuel price revision was stopped on November 3, 2021, and was re-started on March 22 this year, said Moody’s Investors Service on Thursday.

“Based on our estimates of average sales volume between November and first three weeks of March, state-owned refining and marketing companies together have lost around $2.25 billion in revenue on petrol and diesel sales. This equates to around 20 per cent of the combined FY2021 EBITDA for the three entities,” said Moody’s.

Revenue loss of oil PSUs

This loss in revenue will add to the short term borrowings, funded with working capital lines, of the refiners until such time that crude oil prices stay at elevated levels. Over time, the companies might be able to make up for some of these losses if oil prices come down, it added.

“We estimate Indian Oil Corporation’s (IOCL) revenue loss to be around $1-$1.1 billion while that of Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) to be about $550-$650 million over the same period,” it said.

Moody’s further projects that If crude oil prices continue to average around $111 per barrel, the three rated entities — IOCL, BPCL and HPCL — will incur a combined daily loss of around $65-70 million on sale of petrol and diesel unless fuel prices are increased to cover the rising crude oil prices.

A sharp rise in crude oil prices, combined with the refiners’ inability to increase retail selling prices of transportation fuels in India for over four months (between November 4, 2021 and March 21, 2022) due to recently concluded elections in five Indian states, will hurt the profitability of the three state-owned refining and marketing companies.

Transportation fuel prices in India have largely remained unchanged since November 4, 2021, despite crude oil prices averaging around $111 per barrel in the first three weeks of March 2022, compared to around $82 a barrel in early November.

This implies that costs for state-owned refining and marketing companies are currently higher by around $29 per barrel without any corresponding increase in revenue. Based on current market prices, the OMCs are currently incurring a revenue loss of around $25 and $24 a barrel on sale of petrol and diesel, respectively, it added.

As per ICRA, for every $1 increase in crude oil prices at current tax rates, the retail price of petrol and diesel should increase by around 60 paise per litre. Besides, high crude oil prices would also have the impact of increasing current account deficit (CAD) leading to depreciation of the Rupee versus the US dollar. For every 1 rupee depreciation against the exchange rate, the impact on retail prices of petrol and diesel is around 70-80 paise per litre.

Ratings agency ICRA notes that increasing oil prices add to India’s fiscal burden, but it is a positive for upstream oil companies.

Additionally, domestic gas prices notified at $2.9 per mBtu (on GCV basis) for H2 FY22 remain low and accordingly gas production remains a loss-making proposition for most of the Indian upstream producers. While domestic gas prices are expected to increase substantially in the next revision, the gas business of PSU upstream companies would turn profitable,” it said.

Next revision in domestic gas prices is scheduled for April 2022.

Prices of natural gas have also soared to all-time highs as Russia is a large producer of gas and supplies about one third of the gas requirement of Europe, ICRA said adding “Elevated spot LNG prices have led to reduction in demand and lower capacity utilisations of all LNG terminals compared to the previous year. Increase in spot and term LNG prices is negative for new LNG terminals as demand growth is expected to remain muted, impacting volumes and the returns of these projects. Relatively higher spot LNG and term LNG prices will have a negative impact on city gas distribution companies as margins on PNG (I) and PNG (C) could be impacted.”

It was expected that centre could announce cuts in excise duty and other taxes, which may provide some cushion to the OMCs to pass on the increase in crude prices. However with the ongoing volatility and hit on its revenues, a duty reduction is not on cards at the moment. ICRA said that a ₹2 per litre reduction in excise duties would reduce excise collection from petrol and diesel by ₹25,000-30,000 crore (based on estimated consumption in FY23).

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