The government?s bailout package for oil marketing companies (OMCs) has been on expected lines. At least the price hike component, the most crucial part of the package, has been predictable. With general elections round the corner, a moderate increase was inevitable. Instead of the required hike then of Rs 21.43 per litre on petrol, Rs 31.58 per litre on diesel and Rs 353 on an LPG cylinder, the government has increased prices merely by Rs 5 per litre on petrol, Rs 3 per litre on diesel and Rs 50 for a cylinder of liquefied petroleum gas.
This is hardly enough, which is reflected in the fact that OMCs have to still absorb under-recoveries, a larger portion, that is, at Rs 20,000 crore this year to Rs 16,000 crore last year. ?It is a revenue loss no doubt,? says SK Joshi, director, finance, Bharat Petroleum Corporation Ltd (BPCL), one of the three OMCs for whom the package was devised, the other two being Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation (IOC).
Oil marketing companies, incidentally, have been taking up desperate measures to control their losses on account of escalating crude oil prices. Says an executive with an upstream oil company, ?Companies, for instance, have been discouraging the use of LPG, a highly subsidised product, indirectly, by delaying refills and going slow on customer acquisition. Petrol pump outlets of these companies double up as convenience stores to supplement their income. There has also been a proposal to supply premium grade fuel in the metros and not lower grade fuel to improve margins.?
But all of this, say observers, is hardly enough to control under-recoveries, pegged at Rs 2,45,000 crore for the current fiscal. What has made matters worse for these companies is the depreciating rupee, hovering in the range of Rs 42-43 to a dollar, which has pushed up cost of imports significantly.
OMCs, for the record, import almost 70-90 million tonne of crude per annum to meet their refining requirements, which stands at about 120 million tonne per annum.
Domestic production takes care of the balance. A depreciating rupee then means that imports are expensive adding to the mismatch in price. As MN Prasad, formerly chief executive officer of HPCL?s upstream oil company Prize Petroleum and now the head of the Bombay Stock Exchange-listed upstream oil company Selan Technologies says, ?Oil marketing companies don?t get the full realisation on price because they are buying significant amounts of crude internationally at market price but selling refined products in the country at subsidised rates.?
Here?s where the public-sector oil companies (upstream) step in to lower the burden on OMCs. ?They cross subsidise by selling crude at a lower price to oil marketing companies,? says Prasad. This subsidy is significant. For instance, when crude touched $100 a barrel a few months ago, the subsidy given by upstream oil companies was $34 a barrel, say sources. It is more now on account of the escalation in the price of crude internationally. This is reflected in the total share of upstream subsidy, which has been increased from Rs 26,000 crore last fiscal to Rs 45,000 crore this year in the bailout package announced by the government.
Though RS Sharma, chairman and managing director of Oil & Natural Gas Corporation (ONGC), the PSU which is taking up the highest chunk of the subsidy at Rs 38,000 crore this year, says the move is revenue neutral for his company, not everybody is convinced about it. ?I don?t think increasing subsidy is a good move because it doesn?t encourage conservation of fuels,? says an executive with an oil & gas company.
?If energy has to be conserved then some measures have to be put in place to encourage appropriate behaviour among consumers,? he adds.
Most view these measures as additional price hikes on motor and domestic fuels. ?That is the only way out for underrecoveries to come down significantly,? says Ajay Arora, partner, transaction advisory services, Ernst & Young.
A phased increase in price, argue analysts, will actually mitigate the loss on other fronts. That is, the revenue loss to the central government on account of duty reductions, calculated, for the record, at Rs 22,600 crore in the current package, the loss to upstream companies on account of mounting subsidies and the loss to OMCs on account of absorption of under-recoveries.
Even state governments are not out of the loop here as pressure mounts to bring down sales tax on petrol and diesel. For instance, the West Bengal government has reduced sales tax on petrol and diesel by 5% respectively. Bihar too has followed suit with a 2.5% and 1.64% reduction in sales tax on petrol and diesel respectively.
The objective of both governments however has been to help consumers rather than oil marketing companies. This they have done by bringing down the price of petrol and diesel by tweaking with the sales tax component. This again serves no purpose since OMCs have to contend with lower prices and consumers get pampered with subsidised rates.
Internationally, the trend is quite different. Though subsidies are provided to consumers of motor fuels, the fact remains that in an environment of increasing crude prices, governments have been passing the burden to consumers quite a bit. The hike in fuel prices in Indonesia and Malaysia, for instance, has been almost 25-30%, say analysts. ?Even Bangladesh and Pakistan are quite realistic in their pricing of fuels,? says a chairman of an oil marketing firm.
So where does that leave
India? In a spot, if another price hike is not effected in the next few months, According to Joshi of BPCL, the relief provided by the bailout package to OMCs should last for about5-6 months. ?If crude prices ease by then it would surely help us, if not, then a price hike is inevitable.?
