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Wednesday, Aug 03, 2005

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Double-whammy for oil companies

IT IS IRONICAL that when oil prices are scaling newer peaks and global oil majors are raking in record profits, India's refining and marketing companies are wallowing in losses. The first quarter of this fiscal has been disastrous for the three refining and marketing companies — Indian Oil, Bharat Petroleum, Hindustan Petroleum and IBP. While Indian Oil reported a loss of Rs 54 crore — the first in its history — Bharat Petroleum and Hindustan Petroleum posted massive losses of Rs 431 crore and Rs 508 crore respectively. These companies have been done in mainly by the Government's policy on pricing and subsidies for the oil sector.

The policy of holding down retail prices of petrol and diesel even as global crude oil prices rose steadily has damaged the finances of the marketing companies. In fact, the refining and marketing companies were, for the first time, forced to sell petrol and diesel at below cost during the last quarter. The under-realisation on the two was in addition to the subsidy on cooking gas and kerosene; this component has been rising with the oil prices. This double-whammy pushed oil company earnings into the red. Indian Oil, for instance, lost Rs 3,195 crore on subsidy and under-pricing of transportation fuels in the first quarter and this was after taking credit for Rs 1,675 crore as Oil and Natural Gas Corporation's share under the subsidy-sharing scheme. It was much the same with Bharat Petroleum and Hindustan Petroleum.

This situation cannot be allowed to continue for the rest of the fiscal. For, extrapolating these numbers for the whole year reveals a scary picture indeed in terms of losses these companies could post for 2005-06. Assuming that oil prices move further upwards these companies could end up with massive losses this fiscal. The finances of the three companies have begun to deteriorate; Indian Oil borrowed Rs 2,000 crore in just the last three months and this was not for capital expenditure but to bolster cash flows. It is certainly worrisome when oil companies, which are traditionally cash rich, are forced to borrow for working capital. Apart from the near-term impact on their functioning, the current financial mess could cause long-term damage if allowed to continue. It would but be natural for these companies to put on hold their investment plans given the cash crunch, as their immediate priority would be to tide over the current difficulties. This means jeopardising the long-term energy security of the country.

The Government has to take steps immediately to eliminate the under-realisation on petrol and diesel either by allowing the oil companies to raise prices or by reducing duties and taxes. Second, it has to take on a greater share of the subsidy load on cooking gas and kerosene, if necessary through the General Budget, and relieve the oil companies' burden. Postponing tough decisions and pretending that the situation will correct itself will not help for it is now increasingly clear that oil prices are not going to come down in a hurry.

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