Partial diesel decontrol likely for bulk users

Written by Prashant Mukherjee | New Delhi | Updated: Jan 10 2013, 11:42am hrs
Faced with a hefty bill of close to R1 lakh crore this fiscal towards compensating oil marketing companies on selling diesel below cost and naysaying by the finance ministry, the petroleum ministry is set to ask the bulk consumers of the fuel to buy it at market rates.

Currently, bulk consumers power plants based on diesel, companies with captive power units, the railways and road transport corporations buy the fuel at subsidised rates but at slightly lower rates than the retail consumer, thanks to a waiver of dealers commission and discounts offered by the oil companies which compete to get the tenders.

According to oil industry executives, the subsidy bill on diesel would come down by around 18% if the ministrys proposal is implemented. Some economists, however, warned that the move could be inflationary. Since more than two-thirds of the trains in the country use diesel-fired locomotives (Indian Railways accounts for around 5% of bulk diesel consumption), the move could revive demands for introducing a fuel component in freight if not passenger fares that would fluctuate with the price of diesel.

Bulk users account for more than a fifth of the diesel consumed in the country at present: India consumed 88 million tonnes of diesel in 2011-12 and 64 million tonnes up to November this fiscal.

A petroleum ministry official told FE on condition of anonymity: We are working on a proposal to reduce the subsidy by restricting subsidised sales for bulk consumers.

At current prices, the savings in undercoveries would be R12,907 crore, said the official, citing an internal estimate.

Oil marketing companies or OMCs are currently losing R9.80/litre on selling diesel below cost.

If the new proposal comes into effect, then the bulk buyers will have to shell out about R56 per litre (at rates applicable in Delhi), said an oil company executive.

The current retail (subsidised) rate in Delhi is Rs 47.15/ litre and the dealers commission is around Re 1.

According to ministry data, the under-recovery on diesel between April and September was Rs 52,700 crore, while it is estimated that by the end of this fiscal it would be around Rs 98,400 crore. As per the ministrys proposal, state-owned fuel retailers Indian Oil Corporation (which accounts for over 80% of bulk diesel sales) Bharat Petroleum and Hindustan Petroleum will have to revise diesel prices for these bulk buyers on a fortnightly basis, the sources said.

If the proposal is implemented, it would lead to significant upward revision in railway freight, said Ashutosh Bharadwaj, senior analyst at Nirmal Bang Institutional Equities. According to Kalpana Jain, senior director, energy and resources at Deloitte, the move could be inflationary as the cost (of oil) will now be spread across more players.

With average crude prices hovering around $110/barrel, the government has estimated OMCs under-recoveries for this year at Rs 1,68,000 crore. This estimate is based on a time-series analysis keeping the exchange rate at Rs 55/dollar and crude oil at $110/bbl. The under-recoveries for 2012-13 were estimated to be Rs 1,80,000 crore before the diesel price hike. Analysts say crude oil prices will continue to hover in the range of $100-110/barrel during most of 2013-14.

It will be easier for the government to implement differential prices on bulk customers (rather than) ask them to pay the market rate, said K Ravichandran, senior vice-president at ICRA.

For BPCL, Indias second largest public sector OMC, bulk or direct customers of diesel comprised only around 9% of total sales of the fuel up to December this fiscal. For the nine-month period, of total diesel sales of 13,370 tonnes for BPCL, bulk sales comprised 1,161 tonnes, while sales to retail customers was to the tune of 12,209 tonnes. When asked about the impact of the price hike, a senior official with the company said: We have no comments to offer, since we are yet to get any official notification on this.