New Delhi: India’s state-owned oil companies, burdened by a government-controlled pricing regime that makes them sell petroleum products at artificially low prices have put their expansion plans on hold, even as petroleum minister Murli Deora prepares for a meeting with finance minister P. Chidambaram during which he will ask for more compensation for these companies.
Oil marketing companies Indian Oil Corp. (IOC), Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd are finding it increasingly difficult to stem rising losses from selling petroleum products such as petrol, diesel, liquefied petroleum gas for households and kerosene at a government-mandated price. Together, they lose around Rs450 crore a day on this.
Rising Losses (Graphic)
“We will be reviewing all our expansion projects as under-recoveries have gone up to Rs320 crore per day. This solution of sharing losses and issuing bonds can’t continue for a long time,” said S.V. Narasimhan, IOC’s director, finance. “Under-recovery” in the firms is the difference between the cost and the sale price.
“Our overseas plans have come to a standstill,” B.M. Bansal, director for planning and business development at IOC added. The firm had planned to invest Rs56,000 crore by 2012; it has a total debt of Rs34,000 crore.
The government has ruled out an increase in prices of petroleum products because several key states go to the polls this year. Deora will therefore seek more oil bonds. The present compensation package entails issuing oil bonds covering 42.7% of the losses to the companies. This is not reflected in the government’s books as it is a so-called “off balance sheet” transaction. Companies such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL), in the business of exploring and producing crude, bear 33.33% of the losses and the refining and marketing companies bear the rest.
Petroleum secretary M.S. Srinivasan had earlier said the government’s contribution through oil bonds would be increased to 57%, but this is yet to happen. “We have already presented the finance ministry with the under-recovery numbers for 2007-08. The exercise to study the detailed note on the revenue loss on fuel sale is on and will be completed within next three-four days,” he said . He had earlier also said the populist policies on fuel pricing were hurting the oil sector, as reported by Mint on 16 February.
With oil trading at around $100 (about Rs4,000) a barrel, the total losses of the marketing companies in 2007-08 was Rs77,304.50 crore. This is expected to double to Rs1.5 trillion this fiscal.
The total oil bonds allocation for 2007-08 was Rs20,333 crore. Losses in the fourth quarter alone are estimated at Rs29,685.5 crore. Due to overall fiscal constraints, the government has delayed issuing the bonds. “All oil marketing companies are running into trouble. Unless (fuel) prices are increased further, there will be a substantial impact on their working,” Ravi Mahajan, partner at audit and consulting firm Ernst and Young had earlier said.
BPCL had said it may have to shut shop in April because the nature of these subsidies would leave it with no cash as reported by Mint on 29 March.
Even ONGC and OIL are unhappy with the arrangement. “Our cash reserves are not meant to subsidize the losses of oil marketing companies. Due to this burden-sharing, our international expansion plans will be affected,” said an ONGC executive who did not wish to be identified.
In a related development, the ministry is seeking extension of the seven-year tax break for refining projects and withdrawal of 12% service tax on exploration and production.
Deora is also visiting Pakistan on 23 April to resolve issues related to transit fee on the Iran-Pakistan-India (IPI) gas pipeline.