Another shock awaits oil marketers

Written by Pranav Nambiar | Updated: Aug 28 2013, 08:49am hrs
Even as the Centre stares at a massive fuel subsidy bill on account of the falling rupee and rising crude oil prices, an expert committee will, within a month, submit recommendations on a fuel pricing methodology that aims to offer the government some succour. Kirit Parikh, who heads the committee tasked by the government to devise a pricing mechanism benchmarked to EPP (export parity pricing), told FE that if EPP is adopted, diesel prices will fall by R2, and the subsidy burden by R14,000-15,000 crore.

However, the three oil public sector oil refinersIOC, HPCL and BPCLsay they sell fuel at discounted rates and claim that adopting EPP will render many of their refineries obsolete. Some of these refineries are as old as 100 years and may find it difficult to absorb further losses.

EPP refers to the free on board (FOB) export realisation of petroleum products by refiners. The current practice of trade parity (TPP) determines the price of the fuels after adding transportation and customs duty to the international price. The refiners are said to earn about $5.1 a barrel more for diesel on TPP compared to EPP. The government had shifted to TPP in 2006, where the price of refined product is determined as a combination of 80% import parity price and 20% export parity price. The logic was that around 20% of Indias refinery output was being exported at that time, and the ratio remains the same till date.

Parikh said that though the terms of reference for the committee is EPP, he is under no pressure to recommend full EPP and is considering other options like offering some cushion for oil marketing companies (OMCs) or even rejecting EPP altogether. We are studying the implications of EPP on the government finances as well as oil retailers. Different options are on the table, he said. Some analysts say that a modified version of the TPP could also be recommended with a change in the current 80:20 ratio.

Parikh added that as other petroleum products like petrol or kerosene are either not exported or have market determined prices, they fall outside the ambit of the committees mandate. Diesel contributes the largest component of under recoveries. In 2012-13, the under recoveries stood at R1.6 lakh crore, of which diesel under recoveries stood at around R92,000 crore.

The estimates of fuel subsidies when the rupee was trading at 54 to the dollar and the crude oil prices around $100 per barrel stood at R80,000 crore. At current levels where the rupee has breached even 64 levels and crude oil prices have risen to close to $107 per barrel levels, the subsidy will stand at over R1.5 lakh crore. For every rupee fall against the dollar, the under-recovery will increase by R8,000 crore, while every dollar increase in crude oil prices would add R4,000 crore.

The OMCs have made presentations to the Parikh committee, drawing its attention to their weak financials owing to years of under-recoveries along with the recent fall in the rupee. An OMC official said, Considering that the public sector oil refiners export very little petroleum products, imposing EPP makes little sense. Much of Indias exports are done by Reliance Industries, which is a private sector company.

In their representation to the Parikh committee, the OMCs pointed out the legacy issues related to the ageing refineries operated by them. Many of these have been expanded substantially after their commissioning. Several refineries are located in the hinterland and this negatively affects operational efficiency and cost economics.

The rising under-recoveries and delay in compensation by the government have led to heavy borrowings by OMCs at high interest cost,which have dented their profitability. The borrowings by the three public sector OMCs reached R1,38,522 crore in 2012-13 from about R12,000 crore in 2004-05. On such high borrowings, they incurred high interest costs, placed at R10,253 crore in 2012-13 alone.

Parikh said the government will eventually move to a market price regime and the current phase is transitional one. The committee is aware of the concerns of the OMCs. But we will take a decision that takes into account the best interest of the nation as a whole, he said.

The government had in January allowed oil retailers to raise diesel rates by up to 50 paisa per month till the losses on the largest consumed fuel in the country are wiped out. With prices being raised periodically, the losses on diesel had come down to below R2.90 per litre in May. But with the rupee falling by about 12% since April, under-recoveries have now risen to R9.29 per litre.