Oil marketing and producing companies will take a big hit if the government forces a price cut and does not issue more oil bonds to plug the oil subsidy bill of Rs 110,000 crore for the current year, said officials.
The burden of the four subsidised oil products — petrol, diesel, kerosene and LPG — has so far been shared by the oil marketing companies, the oil producers and the government, through oil bonds (see table). On Monday, Finance Minister P Chidambaram had indicated that no additional oil bonds would be issued if crude oil prices remained benign. Crude oil prices are ruling at close to three-year lows of $40 a barrel.
“So far, the sharing has been 50 per cent by the government (through oil bonds), 30 per cent by the upstream companies and the rest by the oil marketing companies. This may not stand this year. We are seeing how to modify it,” said Petroleum Secretary R S Pandey. Without oil bonds, the burden will fall on the oil marketing companies — Indian Oil Corporation (IOC), Bharat Petroleum and Hindustan Petroleum — and the upstream producers — Oil and Natural Gas Corporation (ONGC), Oil India and Gail India.
The country’s largest oil marketer and refiner — Indian Oil Corporation (IOC) — said it is no position to bear “any” subsidy burden this year as it is already making losses. “Our ability to bear any under-recovery burden this year is not there,” said the company’s Chairman and MD, Sarthak Behuria.
IOC posted a loss of Rs 7,047 crore in the quarter gone by (July-September) against a profit of Rs 3,818 crore in the same period a year ago. For the first half of the year, the loss was Rs 6,632 crore against a profit of Rs 5,286 crore in the first half of last year.
IOC’s under-recovery during the first six months of the current fiscal was Rs 12,271 crore (after considering approval received from the government for oil bonds of Rs. 25,082 crore) against Rs 3,508 crore in the same period of the previous year.
Earlier this month, the government issued oil bonds worth Rs 22,000 crore to the three oil marketing companies, of which IOC received bonds worth Rs 11,976 crore.
Similarly, oil marketer Bharat Petroleum also posted a loss of Rs 2,625 crore for the quarter ended September 2008 against a profit of Rs 1,038 crore in the same period last year. Hindustan Petroleum’s Q2 loss was Rs 3,219 crore against a profit of Rs 853 crore in the same period last year. Finances of IOC, along with the other oil marketing firms, are also adversely hit by negative refining margins. Healthy refining margins earlier had helped offset somewhat the losses on marketing. The company has also suffered forex and inventory losses.
As far as the upstream sector is concerned, ONGC bears 85 per cent of the subsidy burden for the sector. Despite record oil prices, the company announced a lower net profit of Rs 4,808 crore for the quarter ended September (against Rs 5,097 crore in the previous comparable period) due to subsidy sharing.
However, since it is still in the green, there was a plan to load a higher subsidy burden on it, with the other two upstream companies. Their contribution to the subsidy sharing for the first six months of the year is already at Rs 25,929 crore — which is more than their contribution for the whole of last year.
| BEARING THE LOSS BURDEN | |||
| Year | 2005-06 | 2006-07 | 2007-08 |
| Oil bonds (%) | 29 | 49 | 46 |
| Upstream sharing (%) | 35 | 41 | 33 |
| Absorbed by oil marketing cos (%) | 36 | 10 | 21 |
| Subsidy burden (in Rs Cr) | 40,000 | 49,387 | 77,123 |
| Source: Petroleum Ministry | |||
ONGC Chairman RS Sharma declined to comment on the issue, saying that the issue is still under discussion.
With crude oil prices ruling at $40 per barrel, oil marketing companies are posting positive retail margins on petrol (Rs 9.86 per litre) and diesel (Rs 0.70 per litre). But the under — recovery on kerosene (Rs 22.40 per litre) and LPG (Rs 343.49 per cylinder) continues.
Despite, this analysts maintain there is no economic rationale for a price cut. The “surplus on some products is meeting losses in others… we need to look at prices holistically rather than in parts,” said Planning Commission member BK Chaturvedi, who recently authored a report on the financial position of oil companies at the request of the Prime Minister and argued for a caliberated move towards market-based pricing.
Such a price cut would also mean an addition to the under-recovery burden from the estimated Rs 110,000 crore.
