Oil marketing companies IOC, HPCL and BPCL have incurred a combined loss of about R25,500 crore in the first half (H1) of this fiscal due to the weakening rupee alone as they pay for crude oil in dollars but the domestic prices are not adjusted to pass on the higher cost to the consumer except in the case of petrol.
The domestic currency has depreciated by R5.22 or 11.7% against the dollar since the beginning of the fiscal to R49.67 on Monday, making the dollar-denominated crude oil costlier for importers. This weakening of rupee has offset the gains arising from crude oil price coming off from the April 28, 2011 peak of $122 a barrel to an average of $110 a barrel in the current quarter.
“For a depreciation of the domestic currency by one rupee, the annual under recovery for the downstream oil industry is R9,800 crore,” IOC director (finance) PK Goyal told FE.
The softening of the local currency by R5.22, most of which happened in the current quarter, has led to a loss of about R25,592 crore for the oil marketing firms. This is only the impact of currency movement, while the total losses from selling fuel below cost (under-recovery), is much more. Fuel retailers are yet to finalise their accounts for the July-September quarter. In the first quarter ? when crude was ruling at $113 a barrel ? IOC, which dominates half of the domestic market for petroleum products, had incurred a loss of R23,806 crore on account of selling diesel, LPG and kerosene at government controlled prices. The company had to absorb about a third of this loss after accounting for government subsidy and discounts from upstream companies ONGC, Gail India and Oil India.
Petroleum minister S Jaipal Reddy has said fuel retailers may incur a loss of R1,21,571 crore this fiscal assuming the average price of Indian basket of crude stays at $110 a barrel. It has been ruling at an average of $110.7 a barrel so far in September. At current price, retailers suffering a loss of R243 crore a day.
A research note on the sector by Standard Chartered Securities, however, said that fuel retailers’ earnings will only be slightly impacted on account of a weakening rupee due to the increased rupee receipts from their dollar denominated refining margins.
The finished products of IOC, HPCL and BPCL are transferred from their respective refineries to their marketing divisions at dollar-denominated import parity or trade parity prices, which form the basis for calculating their refinery margins as well as the under-recovery from their marketing operations. The gap between the refinery gate price, which reflect the price these products would fetch in the global market, and the state-fixed retail price in the local market forms the under-recovery. However, fuel companies also have large overseas borrowings, which are prone to mark to market losses. Upstream companies ONGC and Oil India would make gains from a weak rupee as they sell crude in dollar prices, but it may be partly offset by a higher outgo of oil subsidy to downstream firms.
Private sector refiner Reliance Industries, which exports petroleum products, is also expected to gain from a weak rupee.