Under-recoveries of oil marketing companies are expected to cross fresh government estimates, to touch an all-time high of Rs 140,000 crore during 2011-12. Experts see high crude oil prices and a weak rupee pushing up the subsidy burden of the government and its companies.
In November 2011, the government had estimated Rs 132,000 crore as the gross under-recovery, but Crisil Research puts the figure higher at Rs 140,000 crore compared to Rs 78,190 crore in 2010-11. This may especially turn true, since the government is not likely to allow any increase in price of petroleum products. The calculations are based on an average crude oil price of $110 a barrel and an exchange rate of Rs 49 to a dollar.
According to the research agency, the rising under-recoveries may push some of the OMCs into the red for the first time in their history, as their decreased profits from the refining business will not be adequate to offset their marketing losses. “The refining profits for 2011-12 are likely to decline by 25-30 per cent to Rs 12,000-13,000 crore,” says Sridhar Chandrasekhar, head, Crisil Research.
The study, however, expects under-recoveries to reduce to Rs 60,000-70,000 crore in 2012-13, as crude oil prices could decline to $100 a barrel and the rupee becomes stronger. Under-recoveries, which are the losses incurred by public-sector OMCs from the sale of fuels at a discount to the cost price, are affecting the companies’ profits and liquidity. “Timely compensation from the government will be critical for the OMCs to manage their liquidity,” according to a Crisil report released on Thursday.
It speaks of an almost two-fold rise in under-recoveries, despite an increase in prices of regulated fuels on June 26, 2011. A disruption in its supply from the MENA (Middle East and North Africa) countries (due to political unrest) and a strong demand growth from Asian countries fuelled the rise in oil rices. In addition, a sharp depreciation of the Indian rupee, by almost 20 per cent vis-à-vis the US dollar since August 2011, exacerbated the effect of the increased oil prices on under-recoveries.
Since 2006-07, the government’s share of the subsidy burden has ranged between 45 per cent and 68 per cent; the upstream oil companies have borne about 33 per cent of the burden; and the OMCs have absorbed the remainder. But, the absence of a fixed annual sharing-mechanism for under-recoveries and the uncertain timing of cash payouts from the government adversely affect the profitability and working capital. For the current fiscal year, the government’s share in the total under-recoveries at around 50 per cent will be Rs 70,000 crore. Though CRISIL Research says that this will be in line with the past trend, it will throw the government subsidy calculations hay wire since so far Rs 40,000 crore has been provided by the government for petroleum subsidy.
Crisil further says it expects the upstream oil companies to share 40 per cent of the under-recoveries Rs 56,000 crore — up from 33 per cent in the past. The OMCs will absorb the remainder Rs 14,000 crore as marketing losses, twice the marketing losses of Rs 70,000 in 2010-11.
The gross refining margins (GRMs) of the OMCs fell to $2.2 a barrel in the first half of 2011-12 from $4.1 in the first half of 2010-11. They are expected to remain at $4-4.5 per barrel over the second half of the year, compared to $6.5 per barrel in the same period the previous year. “The GRMs of the OMCs for the whole year are therefore likely to decline to $3-3.5 per barrel, as against $5.3 per barrel in the previous year,” says the study. “Reflecting this fall, the refining profits of the OMCs are likely to decline by 25-30 per cent to Rs 120-130 billion in 2011-12.”
