Under-recoveries are likely to touch R1.4-1.5 lakh crore in the fiscal 2012, almost twice that of 2010-11, with the countrys largest oil refiner and marketer IOC bearing the brunt, since it accounts for more than half the under-recoveries.
With rising crude prices, under-recoveries for all OMCs put together will be in the range of R1.4 lakh crore, PK Goel, director-finance, IOC, told FE. The government will have to compensate companies for this if they have to remain profitable.
For the nine months of April-December 2011, gross under-recoveries of OMCs touched R97,313 crore. Of this, IOCs under-recoveries were R53,251 crore, BPCLs R22,746 crore and HPCLs R21,316 crore.
The total losses will be even more than in fiscal 2008-09, when crude oil prices reached record levels of R138 a barrel, and under-recoveries crossed the R1 lakh crore-mark to touch R1,03,292 crore. Since that year prices fell in subsequent quarters. Diesel could account for more than 50% of under-recoveries in fiscal 2012, against 39% in 2011. BPCL, for instance, loses around R11 on every litre of diesel it sells. It also loses R26.76 on a litre of kerosene, and R378.22 on every cylinder of cooking gas.
Rising tension in the West Asia, with US sanctions against Iran has created a fear premium that has driven crude prices most through the nine months of the fiscal, and the fourth quarter alone is likely to see under-recoveries to the tune of R45,000-50,000 crore, said K Ravichandran, senior vice-president and co-head, corporate ratings at Icra, a ratings agency.
Brent crude prices were up 0.90% to touch $124.17 a barrel at 3 pm on Tuesday.
With government compensation lagging and unable to effect price hike, OMCs profitability will continue to be impacted through the next fiscal also, experts say.
Slow policy reforms in the Indian oil sector increase under-recoveries of OMCs and lead to skewed use of fuels, Fitch Ratings said in a January report. The Indian government made little headway in controlling LPG and kerosene subsidies and given the political uncertainty, it remains unlikely that any progress will be made during 2012.
The government freed the prices of petrol last year, but Fitch Ratings said partial deregulation has led to misdirection of subsidy, defeating the intent of reducing the subsidy burden. This is evident from the increasing use of diesel in private vehicles and power generators, which are not the intended beneficiaries of the subsidy, it said.
Brent crude oil prices averaged $113 per barrel between April 2011 and December 2011, 40% higher than in the same period the previous year. A disruption in oil supply from the MENA (Middle East and North Africa) countries due to political unrest and strong demand growth from Asian countries fuelled the rise in oil prices, Crisil Research said in a report in January.
In addition, a sharp depreciation of the Indian rupee, by almost 20% vis--vis the dollar since August 2011, exacerbated the effect of the increased oil prices on under-recoveries, Crisil said.
If the under-recoveries rise much higher, and fuel prices are not revised, the government might ask us to absorb some part of the losses,said BPCLs chairman and managing director RK Singh in an recent interview with FE. That situation can impact our investment plans.
Meanwhile, Crisil Research on Tuesday said the government will be forced to raise fuel prices on rising crude. Average crude oil prices will remain firm in the range of $110-120 per barrel during 2012, higher than the earlier estimates of $100 per barrel, despite a weak global economy, it said. This will compel the government to hike the retail selling prices of regulated fuels at least by 10-15%in 2012-13 in order to rein in the mounting under-recoveries.