Oil firms on the brink as crude crosses $100

OIL PRICE SHOCK

As crude oil prices set new records, the government-owned oil companies are working on a multi-pronged strategy to cut costs and stave off an impending crises.

"Our working capital is under pressure. But we can still manage to absorb another $2 to $3 per barrel hike in the price of the Indian basket. Above that, we enter dangerous territory," said a senior official of the Indian Oil Corporation, the country's largest marketer and refiner of oil.

While international crude oil prices are close to $110 per barrel, the basket of crude oil that Indian refiners buy recorded yet another record high of $101.2 per barrel on Tuesday, the latest day for which the data is available.

IOC, which is the country's largest company by sales, is cutting inventories, processing more sour crude oil which is cheaper and increasing refinery utilisation.

"We are cutting costs wherever we can. Cutting inventories is one of the things we are doing in order to reduce working capital needs," the official said.

The company has started maintaining fuel inventories of 7 to 8 days for commercial sale. "We used to be have inventories of 14 to 15 days," said another IOC official.

Sour crude oil now accounts for 44 per cent of the company's overall oil basket compared with around 38 per cent a couple of years ago. This results in savings of up to Rs 400 crore per year, the official said.

IOC and its group companies have imported around 80,000 barrels of crude oil per day so far this financial year. This is up from around 55,000 barrels per day in the last financial year. The cost of importing crude oil has gone up by 82.35 per cent to $6.2 million from $3.4 million per day.

Since the government-owned oil companies are forced to sell petroleum products at subsidised prices, each increase in crude oil prices oil means additional burden of so-called under recoveries on the companies.

For instance, IOC bears a daily retail loss of Rs 180 crore, which will be partially compensated at an indeterminate time in the future. As a result, there is a squeeze on working capital, which has led to spike in the company's borrowings to nearly Rs 31,000 crore so far this financial year against Rs 24,000 crore borrowed last year.

"Our cost of borrowing has also gone up by a few basis points," the official said. The company's average cost of borrowing is 6.5 per cent.

The mounting retail losses have however "not yet" adversely affected these companies expansion plans, but they are very close to the threshold price which would hit capital expenditure. "Another $2-3 higher price of crude oil and the capital expenditure funding could begin to be affected," said another official with an oil marketing and refining company.

Higher capacity utilisation of refineries, in order to take advantage of higher refinery margins, is also another measure IOC is adapting to increase pacity utilisation of the IOC group's refineries is around 98.34 per cent compared with around 90 per cent a year ago. Refinery margins in April-December 2007-08 was $9.10 per barrel compared with $3.64 per barrel in the same period of the last financial year.

CRUDE CUTBACKS
(How oil companies are cutting costs)

Reduce fuel inventories to cut daily working capital

Process more sour crude oil, which is cheaper

Increase refinery capacity utilisation

Liquidate oil bonds

Borrow more funds