Indian oil refiners choke as crude prices soar

India's three state-owned refining companies—IOC, HPCL, BPCL—say they are nearing the brink of collapse.

April 25, 2008

2 min read

Shirish Nadkarni
OGJ Correspondent

MUMBAI, Apr. 25 -- India's three state-owned refining companies—Indian Oil Corp. (IOC), Hindustan Petroleum Corp. Ltd., and Bharat Petroleum Corp. Ltd.—say they are nearing the brink of collapse.

The prevailing high price of oil, which has crossed the $115/bbl mark, has badly affected their liquidity, and they are losing an estimated $125 million/day on domestic sales of gasoline, diesel, kerosine, and liquefied petroleum gas.

IOC claims to be losing 3.2 billion rupees/day on sales of these petroleum products at well below production cost, as the government does not permit them to hike the retail selling prices.

The government compensates 42.7% of the total underrealization on fuel sales through the issue of oil bonds, but the oil marketing companies are seeking at least 60%. They currently lose 10.78 rupees/l. on petrol, 17.02 rupees/l. on diesel, 25.23 rupees/l. on kerosene meant for the public distribution system, and 316.06 rupees behind every LPG cylinder.

"This year, we are just about okay; but if the situation continues for another year, all our projects will get impacted," said IOC Chairman Sarthak Behuria. "Our borrowings have risen to 354 billion rupees as on Mar. 31. "Last year, we sold oil bonds worth 100 billion rupees. This year, we have about 170 billion rupees worth of oil bonds on hand and may have to sell most of these."

Official sources said the under-recoveries of the three state-owned refiners on sales of petroleum products may double this year and reach 1,500 billion rupees without an appropriate compensation package. The three fuel retailers collectively lost 773.04 billion rupees on fuel sales in fiscal 2007-08.

Amid concerns of galloping inflation, which has been hovering at around 7.5% through April, and the upcoming elections in several states later this year, an appropriate fuel price hike appears most unlikely.

Few options are available to Petroleum Minister Murli Deora. All he can do to save the refiners from a virtual collapse is to cut the excise duty and provide a major oil-bonds package. A detailed note on the revenue loss suffered on fuel sales in 2007-08 has been sent to India's Finance Minister for consideration.