High prices may hit oil firms' future plans

Huge retail losses due to soaring global crude oil prices are likely to hit the expansion plans of domestic oil marketing companies.

"If we continue to incur these kinds of under-recoveries for another year, our project funding will get impacted," said Indian Oil Corporation (IOC) Chairman and Managing Director Sarthak Behuria.

The expansion plans of IOC, Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), which also operate refineries and petrochemical plants, are currently being funded more through debt than by using internal cash reserves of these companies.

IOC, which recorded a debt-equity ratio of around 0.7 last year, has seen it rise to 1. The debt-equity ratio of the other two companies has also risen from around 0.8 to around 1.

Major refinery projects around the world have been hit by rising project costs. For example, ConocoPhillips' refinery in the UAE and a Saudi Aramco refinery project are being reviewed due to rising project costs.

The debt component for these projects had grown bigger than equity, resulting in projects being reviewed, said a Mumbai-based analyst.

"Previously, oil companies would self-finance their projects. Now it is becoming very difficult for these companies to get loans at competitive rates. This will seriously affect their project funding," said an analyst of a leading consultancy firm.

Although projects in other sectors, such as power, have very a high debt component compared with the equity component, a debt-equity ratio of more than 1 is not common for oil projects.

The rate of interest on borrowings for IOC, the country's largest crude oil refiner and marketer of petroleum products, has gone up to around 8.5 per cent compared with around 6.5 per cent a couple of years ago. Oil exploration companies such as Oil and Natural Gas Corporation (ONGC), on the other hand, can leverage loans at around 7 per cent.

IOC borrowed Rs 35,000 crore in FY08, almost 30 per cent higher than Rs 27,000 crore in FY07. HPCL's borrowings in FY08 were over Rs 13,000 crore compared with Rs 8,000 crore in FY07, while BPCL borrowed Rs 14,000-15,000 crore, up from around Rs 11,000 crore in FY07.

"The moment our borrowings cross Rs 40,000 crore, banks will stop lending to us," said Behuria. "Liquidity crunch is grave," he added.

The government issues oil bonds to oil marketing companies partly to offset the burden of revenue losses. However, oil companies sell these bonds at a heavy discount. "There are also so many oil bonds in the market now that it is getting difficult to get good rates," said an HPCL official.

Subsidised prices are also hitting profits of these companies. "The fourth quarter does not look good at all," Behuria said. Another IOC official said that the company was likely to record losses in the fourth quarter.

In the quarter ended December 2007, HPCL recorded a net loss of Rs 15.7 crore, while it had reported a net profit of Rs 407.3 crore in the previous comparable period. BPCL's net profit fell to Rs 291.3 crore in the quarter ended December 2007 compared with Rs 303.5 crore in the year-ago period.

The oil marketing companies lost almost Rs 78,000 crore in FY08 as they sell petrol, diesel, cooking and kerosene at subsidised prices. At current prices, this loss could go up to Rs 140,000 crore in FY09.