While the government and oil marketing companies (OMCs) seek to bolster their bottom lines with the recent fall in global crude oil prices and the phased deregulation of diesel prices, upstream oil companies are left high and dry. According to sources, Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) have requested the government to cut the discounts they must give refiners on crude purchases as oil prices have softened.
Recently, the two oil producers separately wrote to the petroleum ministry that with crude prices around $97-$100 since March and their cost of production remaining at around $43 (including the oil cess), their returns would soon turn negative. The discount the upstream companies offer is fixed at $56/barrel, and this amounted to making good around 40% of the OMCs? under-recoveries, with the rest of the burden borne by the Centre.
Sources said ONGC has sought a $60 per barrel realisation on sales, up from the current $47 per barrel. In other words, it wants the discount to be reduced to around $43 a barrel at current crude prices. OIL wants its realisation capped at $65 per barrel, up from the current $54-55 per barrel.
Crude prices were as high as $ 113.24 per barrel as recently as February.
An ONGC official told FE that the company could earn negative returns in the first quarter of 2013-14 if the discount levels were left unchanged. ?From the prevalent crude oil prices of $100 per barrel, if you take away the $56 discount and $43 for cost of production, we will be making negative returns,? said the official.
Upstream companies? discount to refiners has remained at $56 per barrel over the last two financial years. The discount was decided on the basis of global oil prices at $110 per barrel.
?If we are allowed to realise $65 per barrel of crude sold, our capex requirements can be met. In the current year, we have a capex plan of about Rs 3,500 crore, and for the 12th Five-year Plan, we have budgeted Rs 19,000 crore,? said Ananth Kumar, director (finance), OIL.
Oil producers are hoping for a revision in discounts for 2013-14 as the fuel subsidy burden is expected to fall this year. This will be on account of the de-regulation of petrol prices, hike in diesel prices and capping of the subsidised LPG cylinders per household at nine. Once the direct benefit transfer (DBT) scheme is implemented, it would also result in significant savings on the oil subsidy front. The oil ministry reviews discount levels every quarter taking several parameters into consideration, including global crude prices, currency movements and production numbers.
According to a Barclays report, with the demand likely to remain soft on refinery maintenance and the markets well supplied, oil prices will likely remain soft in the near term, before recovering in the second half of 2013. The report adds that they expect a range-bound market for 2013, with Brent averaging $112 per barrel similar to averages since 2011.
Oil marketing companies including Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum sell diesel, kerosene and cooking gas at rates below market prices and get subsidies in the form of upstream discounts and cash compensation from the government. Total under-recoveries calculated for 2012-13 is Rs 1,60,000 crore, out of which upstream oil companies are expected to pay Rs 60,000 crore. Under-recoveries on diesel have now fallen to $2 per barrel from $10.72 in February.