Are oil cos. slipping on policy concerns?

Wed, 15 Feb Pre-Open

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A look at the latest interim results of state run Oil Marketing Companies (OMCs) may give one the impression that the sector is back on track. However, the multifold rise in profits for the December quarter is just a quick fix solution to the issue of regulated pricing of petroleum products and resultant losses faced by OMCs in rising crude price scenario. Despite a handsome increase in the subsidies by government and upstream companies, the net earnings of these companies are in the red for first nine months of FY12. This signifies that the problem is far from over and calls for some tough reforms in the sector.

Forget the diesel deregulation. The companies are bleeding on account of petrol that was deregulated more than a year ago. The country's largest refiner, Indian Oil Corporation (IOC) along with other players (Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL)) has recently approached government to compensate for the losses incurred on selling petrol at less than international prices when crude prices remain high.

While the government has deregulated on petrol on paper, it has a significant say when it comes to timing and extent of revising petrol prices. This mostly happens too late and offers too little relief to the OMCs in terms of loss recovery. The companies' loss on petrol stands around Rs 3 to Rs 3.2 per litre since last downward revision in December. Besides, the OMCs are currently losing around Rs 4.5 bn per day on the sale of regulated petroleum products (LPG/liquefied petroleum gas, diesel and kerosene). And it's not just the absolute under recoveries that have jumped. For the first nine months, the OMCs are sharing close to 16% of the under recoveries as compared to 8.8% last year.

The ad hoc subsidy declaration at the time of results lets OMCs report profits. However, such move aligns the interest of upstream and downstream sector inversely (since subsidy outgo for upstream is inflow for downstream). Besides, all this while, the OMCs need to increase borrowings to meet working capital requirements. This adds finance charge outflows to the already mounting operational losses.

It' is time that the government makes some quick moves towards sensible pricing of fuel products or rationalization of taxes rather than declaring subsidies at the time of results announcements. Such a move will be rewarding for the government balance sheet as well as it gears up for disinvestment in companies like ONGC.