Public sector OMCs pay for indecision over price decontrol, lag private peers

The government’s indecision on freeing pricing of petroleum products for state-owned oil marketing companies (OMCs) is not only hurting their profitability, but also eroding their competitive strength against private sector oil companies.

Left with little or no surplus funds, the PSU OMCs are unable to modernise their operations leading to a widening gap in gross refining margin (GRM) with their private sector counterparts.

In the last two financial years, while the GRMs of state-owned OMCs have declined sharply, private sector refineries have improved their efficiency and reported an increase in margins. The situation has worsened for the PSUs this year with some of them reporting negative GRMs as compared to handsome gains made by the private sector companies during the period.

GRM is an effective tool to measure the efficiency of any refinery. Higher GRM is also a reflection of technological superiority of a refinery.

While the GRM of country’s largest OMC Indian Oil Corporation (IOC) has fallen from a level of $4.3 per barrel to $4 per barrel between 2010-11 and 2011-12, during the same period Reliance Industries (RIL) has increased its GRM from a level of $6.6 per barrel to $8.4 per barrel. Other state-owned OMCs like HPCL, BPCL, and MRPL have posted even sharper fall in their GRMs for the period.

The trend seems to continue through this year as well.

RIL posted a higher-than-expected GRM of $7.6 per barrel during the first quarter, while refining margins of IOC, HPCL and MRPL fell into the negative territory to -$4.81/bbl, -$2.05/bbl and -$4.5/bbl for the quarter ended June 30.

?We have our refineries all over the country. For RIL, it?s a coastal refinery. They do not have the inventory volumes as much as in IOC pipelines. We have bigger risk on inventory loss. When prices go up, we gain. This is a business cycle; sometimes it helps to gain and sometimes it result in loss,? IOC chairman RS Butola said.

?The fall in GRMs is also due to a sharp fall in crude prices and devaluation of the rupee. Also we had to shut down our plant for 10days due to water shortage and had to carry forward our inventory when prices of crude and products were declining sharply resulting in inventory loss,? MRPL MD PP Upadhya said.

Refining margin is the difference between the price at which oil companies purchase crude from explorers and the price at which they sell the end product after processing the crude.

For instance, crude is purchased on a particular date and the tanker arrives in the country, it is unloaded, processed and then sold in the market. This takes at least 20-40 days. During the period, if the crude prices decline then GRMs also take a hit.

The second point that determines the GRM is its Nelson Complexity.

Higher Nelson Complexity of a refinery enables it to process inferior quality crude or heavy sour crudes that tend to give better GRMs, due to price differential between sweet and sour crude.

?Companies like Reliance and Essar are processing large quantities of heavy crude or ultra-heavy crude that are 8-10% cheaper and give them distinct advantage to increase GRMs,? IOC former director (refinery) BN Bankapur said. Private refining companies such as RIL and Essar Oil enjoy higher refining margins of $10/barrel due to the higher complexity of their refineries.

?Other oil companies do not have the facility to process that kind of crude with consistent quality. Apart from that, there are logistics problems to pump the crude through 1,200-1,300-km pipeline that will reduce the capacity,? Bankapur added.

The Nelson Complexity Index for the RIL refinery is 11 and for the overall Jamnagar Complex is around 14.0. At present, Nelson Complexity index of the MRPL refinery is 5.