Oil marketing companies IOC, HPCL and BPCL would be able to report profits for the fourth quarter of 2011-12 on the strength of their refining margins and the extra government subsidy to compensate about 80% of their losses incurred in the period due to selling auto and cooking fuels below cost.

As per a petroleum ministry communication to oil retailers on Monday, IOC would get R20,861 crore, HPCL R8,486 crore and BPCL R9,153 crore as state subsidy for the January-March period of 2012, said sources.

The total subsidy for the period works out to R38,500 crore, while retailers will have to absorb the remaining loss of close to R10,000 crore.

However, a 4% appreciation of the rupee during the period would depress even the companies? refinery margins for the fourth quarter of the 2011-12, limiting their profitability.

Refinery margin is what they earn in dollar terms while transferring finished petroleum products at global (import parity) prices to their marketing divisions, which retail these at state-set prices, incurring what is called under-recoveries or marketing losses.

Retailers do not offset their refining margins against their marketing losses but if they have to absorb the unmet under-recoveries, it affects their profits.

Sources said that upstream companies ONGC, Gail India and Oil India have shared Rs 55,000 crore of retailers’ losses. They have absorbed IOC’s under-recovery of Rs 29,961 crore, HPCL’s Rs 12,082 crore and BPCL’s 12,957 crore.

With the sanction of subsidy for the fourth quarter, IOC, HPCL and BPCL would now show their respective entitlement in their profit and loss accounts as revenue grant from the government. The actual receipt of cash will take time. It would actually be disbursed from the Rs 43,580 crore earmarked for the 2012-13 fiscal, which means the government will have to substantially increase the subsidy for the current fiscal in the supplementary demands for grants expected later in the year.

Government subsidy has now gone up to Rs 83,500 crore for the last fiscal. Economists said that the artificial suppression of fuel prices is getting reflected in government finances in a major way now. Deregulating the price of fuel, particularly diesel, is the best solution for sustainable energy pricing in the medium term, said a leading economist.