Oil refiners seek stronger policy framework beyond price hikes and duty cuts

The public sector oil refiners were counting on some key initiatives in Wednesday's meeting of the Empowered Group of Ministers which has since been deferred.

“We were hoping that the think-tank would go beyond price hikes and duty cuts. These are typical knee-jerk reactions when the need of the hour is a long-term policy framework. The time has come to review the subsidies for auto fuels which must go while (subsidies on) cooking fuels should ideally be transferred to the Budget,” an oil sector executive told Business Line.

Clearly, the Centre will be hard-pressed this fiscal to implement a hefty price hike in diesel and petrol keeping in mind the spectre of inflation. Yet, from the refiners' viewpoint, it is galling that auto fuel subsidies are doled out to those customers who can afford a Mercedes or BMW.

For the moment, there are no immediate solutions unless a diesel-pricing policy is in place for auto and non-auto applications. Even within the automotive space, trucks and buses need subsidised diesel, except that this will necessitate a separate pricing system for cars, which is easier said than done.

The same holds true for cooking gas where the subsidy of Rs 330 per cylinder is extended across the end-user chain. “Ideally, the Government should use the UID scheme to identify those people who actually need the subsidy while eliminating it for all others,” an oil industry official said. This will also come in handy for kerosene pricing and put an end to the current practice of adulterating it with auto fuels.

Practically impossible

Though petrol has been deregulated, it is practically impossible for refiners to pass on the entire hike of Rs 7 a litre to the end-user. Likewise, in diesel, losses are over Rs 17 a litre. There were expectations among the oil sector constituents that the EGoM meeting would look at duty cuts for auto fuels, even though this will impact the Finance Ministry's revenue targets for this fiscal.

“This is still a better option than the Government issuing cash compensation to the refiners, which will only get higher with crude ruling at levels of over $100/barrel,” sources said.

Clearly, the Centre has a tough task ahead, especially when inflation is threatening to get out of hand. It is responsible for the health of its public sector oil companies but cannot risk implementing a stiff price hike. It now remains to be seen if the rescheduled EGoM meeting will formulate a pricing framework for the future, though this will only be an encore of what several expert committees have already done in the not-so-distant past.

Incidentally, IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are due to declare their annual results by the end of this month. The Finance Ministry's cash compensation is imperative if the trio has to post profits for 2010-11. Given that the main focus of the EGoM meeting was to examine the financial health of the refiners, it may end up being held sooner than expected.

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