Deregulation brings relief to oil companies

Deregulation brings relief to oil companies

Mumbai: Oil marketing companies (OMCs) have seen less strain on their finances in the quarter ended 30 September after a government decision to deregulate petrol prices on 26 June put an end to the practice of selling the fuel below cost to customers.

Indian Oil Corp. Ltd (IOC), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL) said that they had little or no “under-recoveries" from the sale of petrol compared with Rs2,227 crore between April and June. Under-recoveries are the loss in revenue caused by selling petroleum products at below-cost prices.

This revenue gap has worried investors, stretched the finances of OMCs and added to the government’s fiscal woes.

BPCL chief executive officer S.K. Joshi said his company had a gap of Rs600 crore between its cost and sales price on petrol in the first quarter of 2011 while the corresponding figure for the second quarter was “negligible" at Rs70 crore.

A senior official at HPCL, who did not want to be identified, said HPCL did not face any under-recovery on the sale of petrol during the second quarter of the current fiscal, while this gap was Rs570 crore in the first quarter.

IOC, too, did not face any under-recovery on the sale of petrol in the September quarter, while it had an under-recovery of around Rs1,000 crore in the first quarter of the fiscal.

Deregulation has ensured that oil companies can adjust retail petrol prices in sync with global prices.

Public sector OMCs have raised petrol prices four times since prices were freed. They can review and set petrol prices once a month.

The prices of other petroleum products such as kerosene, diesel and liquefied petroleum gas (LPG) continue to be set by the government. OMCs continue to sell them at below the cost at which they acquire these fuels. The government has often covered this gap by giving the OMCs bonds rather than cash, which puts pressure on the liquidity of these companies.

According to a Citigroup Global Markets report dated 27 June, prior to the deregulation of petrol, one-tenth of total under-recoveries of state-run OMCs—around Rs7,500 crore—was on account of selling petrol at a negative margin.

Analysts expected the fuel subsidies paid out by the government to OMCs to fall by a quarter thanks to deregulation.

Murli Deora, minister for petroleum and natural gas, at a conference in Mumbai on Monday, said the government estimated total under-recoveries at Rs59,000 crore for 2010-11.

The stock prices of the three OMCs have performed well since the government decontrolled retail prices of petrol. Shares of BPCL, IOC and HPCL gained 16.5%, 14.75% and 3.19% on the Bombay Stock Exchange (BSE), respectively. During the same period, the Bombay Stock Exchange’s oil and gas index lost 0.89%, while its benchmark equity index, Sensex, rose 13.03%

“The government’s decision to free up petrol prices appears to have worked well for the oil marketing companies," said an analyst with foreign brokerage. He did not want to be named as he is not authorized to speak to the media. “However, if international crude and petroleum prices were to touch levels as high as in 2008, these companies may not be able to raise prices commensurately due to inflationary pressures, and under-recoveries may surface again."

International crude prices touched an all-time high of $147 a barrel in 2008. At present, it is priced at around $80 per barrel and have been mostly range-bound over the last few months.