, chairman of Indian Oil Corporation (IOC), has a mission to "save the company" that may be headed for its first-ever annual loss this year. The Fortune 500 company, India's largest marketer and refiner, is reeling under the burden of oil subsidies "" which makes petroleum products like petrol, diesel, kerosene and LPG cheaper for consumers.
"Everyone knows what needs to be done if the oil companies are not to go the way of the fertiliser companies," he tells Rakteem Katakey and Vandana Gombar, as he heads off to convince the newly set up Chaturvedi Committee about the need for market-driven pricing. Excerpts:
What have you been telling the Chaturvedi Committee?
We have met the committee just once. It is similar to the Dr Rangarajan Committee, for which big meetings and several discussions took place.
But only a part of the recommendations has been implemented. If only the Rangarajan Committee recommendations are implemented there is no need for anything else to be done "" issues such as targeting subsidies and making petrol and diesel prices market-driven have not been implemented. We have repeated that these under-recoveries are not sustainable.
Petrol should not be subsidised and diesel subsidies should be reduced. Kerosene should be targeted and the number of cooking gas cylinders should be restricted.
All stakeholders must bear the burden. Bonds and upstream sharing are not going to solve the problem because the amount of under-recoveries "" around Rs 240,000 crore "" has become huge. All we have been able to do is save Rs 40,000 crore through the fuel price increase and duty cuts.
Are under-recovery numbers inflated?
The true test of any company is the profit it makes. For a company with a turnover of Rs 240,000 crore, all the profit we are making is Rs 7,000 crore.
We made losses in the last quarter (the fourth quarter of 2007-08) and are likely to make losses this year and this quarter. Also, look at our huge borrowings. Where is the inflation of under-recoveries if we are in this state? We are not hiding the money anywhere. It is all audited.
At current oil prices, what is the worst-case scenario?
At the kind of under-recoveries we are looking at, the government will have to make good with bonds. If the oil marketing companies bear more than Rs 20,000 crore of the annual under-recoveries, they will be incurring losses.
Upstream companies such as ONGC can give around Rs 45,000 crore. The rest will have to be through bonds. If they do not, then we will make losses.
How long can you sustain these losses?
This company can sustain a loss. Nothing will happen. We will still be working and our projects will be on because we has spent 30 years absorbing these losses. We can sell 100 acres of land and pay salaries for six months. These are not the issues. The issues are: what are our borrowing capabilities to fund working capital and projects, financial institutions' ability to judge you to repay funds and the evaluation in the market itself.
Bonuses and salaries are driven by profits. Everyone in the company, including myself, will be affected. Staff morale will be down. It has a cascading effect. Who would want to work in a company that is making losses year after year? It will become like a fertiliser company.
Will the windfall tax demanded by the Samajwadi Party help bail you out?
After everything, Reliance Industries' profits are still below Rs 20,000 crore. How much can you take from them? This is only trying to do some tinkering. It does not address the real issues. The entire refinery sector together made profits of around Rs 30,000 crore last year. It will not help me by more than Rs 2,000-3,000 crore while the under-recovery bill is over Rs 240,000 crore.
Where do you see Indian Oil Corporation in 2020?
I will tell you after 2008-09. This is going to be a very difficult year. This year will decide the destiny of IOC and the downstream companies. Probably in the first year after the elections, we will know whether we will stay where we are or we will be like the fertiliser industry.
Capex has been hit. Which are the projects affected?
We are not looking at new projects. We are even struggling to meet our commitments for ongoing projects. Our capital expenditure plans are worth Rs 40,000-45,000 crore. We will have to complete our ongoing projects. We will not open more retail outlets unless there are strategic sites.
We are looking at diversifying but we can add only around 5 per cent to our revenues through diversification. It cannot substitute our primary businesses. We are also cutting down on non-plan expenditure.
What is your outlook on crude oil prices and availability?
Producers are starting to get worried because there is going to be a slump in demand due to high prices. I expect Chinese demand to come down after the Olympics and that will lead to some price correction, though nothing will happen in the next few months. I also do not see a shortage of crude oil. The problem will be the ability to buy.
Once domestic gas production begins from the Reliance and ONGC discoveries, once alternative fuels kick in, will your core business of liquid fuels be affected?
There is growth in demand for liquid fuels. Liquid fuels will continue to be the primary fuels in our generation at least. City gas will impact 8-10 per cent of LPG production, but LPG demand itself is growing at over 8 per cent.
Naphtha meant for industries is being imported and we will anyway use it in our naphtha cracker project at Panipat. We are not worried about our core business.
