It is an all-too familiar scenario for the public sector oil companies. Fuel losses are soaring with no indication when a price hike will be implemented.
Thanks to a double whammy of high crude prices ($105/barrel) and a weak rupee, IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are up against fuel losses of Rs 140,000 crore this fiscal. Obviously, this will change keeping in line with global crude and product price movements.
In diesel, the losses have doubled over the last couple of months to Rs 14 per litre. The Government had committed itself to freeing diesel prices through monthly nominal hikes of 50 paise. Everything seemed hunky dory till recently when the gap was reduced to Rs 6 per litre. The rupee crash completely ruined the script and diesel losses have since skyrocketed.
Ever since 2008, when crude prices touched $160 per barrel, losses on the sale of subsidised diesel, petrol and cooking gas would go through the roof with the Government stepping in at the last minute to offer a compensation package. By this time, borrowings would have reached giddy levels and the interest burden eventually borne by the trio of IOC, BPCL and HPCL.
Finally, the Government decided to free petrol prices amidst severe political opposition. Diesel was recently added to the list.
Pricing risks
The oil industry has no clue what will happen in the coming weeks. The most obvious solution is to hike diesel prices. However, the hike will have to be restricted to Rs 2-3 per litre as it can otherwise stoke inflation.
This is also ‘election year’ and a diesel price hike will be politically suicidal. As an oil sector official puts it, “Everyone is hoping the rupee settles to a saner Rs 60 (to the US dollar). If that does not happen, we are in for big trouble.” The other big concern for the oil PSUs is the Government’s intent to explore export parity pricing as a formula to square fuel losses. Now, this is done using import parity pricing and the Government reckons it will save nearly Rs 20,000 crore opting for export parity. A decision on this will be taken soon. A change could be a big blow to the PSUs.
The compensation formula also involves support from the upstream combine of Oil and Natural Gas Corporation and Oil India. On paper, this ought to be capped at a third of the refiners’ losses but this has seldom been the practice for a while now.