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`Oil companies' capex will take a hit due to subsidy burden'

R.Y. Narayanan

Coimbatore, Jan. 4

THE capital expenditure plans of oil companies will be hit if the under-recoveries continue but the Government is making the effort and one has to wait and see as to how it resolves the issue, according to Mr S. K. Joshi, Executive Director (Treasury), BPCL, Mumbai.

However, he did not want to take a call on how much the subsidy burden would erode the profitability of the oil companies.

He told Business Line that the issue at stake was the long-term energy security of the country and the high under-recoveries and losses "would certainly hit the oil companies" capital expenditure programmes.

Asked whether the proposed merger of Kochi Refineries Ltd (KRL) with BPCL would provide a cushion to the latter since the standalone refineries enjoyed a higher margin compared to the marketing companies, he said he would not like to comment on this at this juncture.

He said all the stakeholders — oil companies, the Government and the consumers — would have to take a closer look at the situation. The main cause for the present hardship was the steep rise in oil price in a short period. It was a very abnormal situation and felt that this was a `passing phase'. Mr Joshi admitted that the days of "low oil prices were over" and it would continue to remain at a higher level.

Small spreads, low margins: Oil industry was a high turnover industry where the spreads available were small. While crude accounted for 92-93 per cent of the cost, trefining took away 2-3 per cent, apart from the spending on marketing. The margins available were wafer-thin and even a marginal increase in crude oil prices would make a major dent in the financial performance. He said the Government was working towards resolving the issue.

Mr Joshi said if the crude oil price continues to stay above $60 per barrel, it would make other energy sources more economically viable. With India trying to bring more gas into the country, he expected the share of LNG in the total energy basket to go up from 8 per cent to 20 per cent.

Doped petrol: On the impact of mixing of ethanol with petrol, he said even if the mixing was 5 per cent, it would be almost 3 per cent of the energy consumption as automobile fuel accounted for a major quantity of petroleum consumption.

On the strategy to expand the reach of BPCL in the South, Mr Joshi said the company has in the past two years increased the number of retail outlets, and also focussing on enhancing their productivity. He said the company's premium blend petrol under the brand name `Speed' has been well accepted by the customers and accounted for more than 10 per cent of the total petrol sales despite the higher price. BPCL has come out with another petrol blend, `Speed 97' that has been accepted well in the market though it costs around Rs 60 per litre.

On the `Petrocard', he said a strategy group was working on revamping the business.

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