Crude shock: IOC restricts fuel supply

Crude shock: IOC restricts fuel supply
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First Published: Thu, May 29 2008. 01 17 AM IST

Slipping into the red: Indian Oil Corp.’s Sarthak Behuria. IOC recorded a loss of Rs414.27 cr in Q4, the first quarterly loss in more than 2 years. (Ashesh Shah / Mint)
Slipping into the red: Indian Oil Corp.’s Sarthak Behuria. IOC recorded a loss of Rs414.27 cr in Q4, the first quarterly loss in more than 2 years. (Ashesh Shah / Mint)
Updated: Thu, May 29 2008. 01 17 AM IST
New Delhi: In a move that may trigger a panic response from consumers, Indian Oil Corp. Ltd, or IOC, the country’s largest oil refiner and oil marketing company, hamstrung by rising losses on account of selling petroleum products at a subsidized price, has decided to restrict the sale of petrol, diesel and liquefied petroleum gas, or LPG, cylinders.
Slipping into the red: Indian Oil Corp.’s Sarthak Behuria. IOC recorded a loss of Rs414.27 cr in Q4, the first quarterly loss in more than 2 years. (Ashesh Shah / Mint)
Bharat Petroleum Corp. Ltd, or BPCL, has already partially capped sales by linking it to what the fuel vends demanded and got last year.
“We have restricted our sales subject to availability. The market will have to feel the pinch for diesel and petrol. There will be pressure in some parts of the country over the next few weeks. We have seen this kind of crisis in the (19)80s and the ’90s. I am not saying there will be a dry-out. However, there would be a panic situation. We will also aggressively sell premium products such as branded petrol and diesel,” Sarthak Behuria, chairman and managing director of the company, told reporters at IOC’s annual press meet.
Murli Deora, petroleum and natural gas minister, declined comment on IOC’s move.
“I hope we do not see the days of rationing of essential commodities such as petroleum products. A decision needs to be taken immediately,” he had earlier said.
IOC recorded a net loss of Rs414.27 crore for the fourth quarter of 2007-08 as compared with a net profit of Rs1,502.69 crore in the corresponding period of the previous year because of what oil firms call “under-recoveries”— the difference between the retail price of fuel and the production cost for the company —in its retail sales of petroleum products. This is the company’s first quarterly loss in more than two years.
/Content/Videos/2008-05-29/2805 Anil on IOC_MINT_TV.flv
IOC recorded a net profit of Rs6,962.58 crore in 2007-08, a fall of 7.15% from previous year. Net sales for the year were Rs2.24 trillion, higher by 12.55%. The firm’s borrowing reached Rs41,000 crore on account of under-recoveries.
Crude oil prices have more than doubled from a year ago and hit a record $135.09 (Rs5,836) a barrel on 21 May. When the government had last increased prices on 14 February, international prices of crude were at $100 per barrel. Total under-recoveries at government-owned oil marketing firms in 2008-09 are expected to be around Rs2 trillion.
D.K. Joshi, principal economist, Crisil, said: “The current scenario is leading to many uncertainties in the system. They (the government) should be using prices as a signal, the-re is no other signal that works. In cross-subsidization, you are painting the entire economy with the same brush.”
Justifying the decision to impose restrictions, Behuria said: “We have realized that a lot of sectors which used fuel-oil or naphtha have shifted to diesel due to the pricing (diesel is heavily subsidized). A lot of demand is coming from the non-transport sector. We will not sell petrol and diesel aggressively as the diesel demand has increased by around 30% and the petrol demand by 20%. We are unable to meet this unrelenting demand. We will not import diesel to meet this demand.”
“By September, our debt-equity ratio will take a beating and our net worth will be eroded. Sustainable borrowing is an issue,” added S.V. Narasimhan, director, finance, IOC.
IOC’s decision comes even as the petroleum ministry plans a fuel price hike and a cut in customs and excise duties on crude and crude products. It wants to remove the 5% import duty on crude and reduce it on petrol and diesel to 2.5% (from 7.5%), while lowering excise duty on both products. At the same time, the ministry has proposed that prices of diesel and petrol be raised by Rs2 and Rs4 a litre, respectively.
Commenting on the fuel price hike issue, Behuria said: “The issue is more political in nature.”
The United Progressive Alliance, or UPA, government at the Centre is already under pressure, both from its allies as well as the opposition, for its failure to rein in inflation, which is widely expected to worsen before it gets better. After its defeat in the Karnataka elections, a politically diminished Congress will likely find it difficult to address the political opposition to a rise in fuel prices.
A statement issued by the CPM politburo on Wednesday said: “In no case can the UPA government pamper the private oil firms to make windfall profits and, at the same time, increase the price of petrol and diesel and burden the people further when they are suffering from steep price rise of essential commodities.” It added that many other countries had renegotiated their contracts with oil sellers with a threat of imposing windfall taxes on such profits
India has a refining capacity of 149 million tonnes per annum of crude, and the firm has a 40.4% share of the business. IOC is currently losing Rs300 crore a day because it sells petrol, diesel, kerosene and LPG at a loss of Rs16.33 per litre, Rs23.49 per litre, Rs28.72 per litre and Rs305.90 per cylinder, respectively.
“More than 65% of our product is being sold below the market price. These figures are for May and may increase from June,” Behuria said.
At the same time, the firm has witnessed an increase in the cost of its projects which are under implementation. The cost of its 15mtpa refinery and petrochemicals complex at Paradip has gone up to Rs45,000 crore, an increase of 73%. With its cash flows affected, the implementation of these projects may be delayed.
“We have taken a decision that all new projects will not be taken up. We need cash. Unless we have upfront cash, we cannot generate debt,” Behuria said.
(Sanjiv Shankaran and Ruhi Tewari contributed to this story.)
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First Published: Thu, May 29 2008. 01 17 AM IST
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