Petrol deregulation helps halve OMCs' losses in Q2
New Delhi   18-Oct-2010

Petrol price deregulation in June and a moderate fall in crude oil price since the beginning of the fiscal have helped fuel retailers IOC, HPCL and BPCL to reduce their losses from selling products below cost in the second quarter of this fiscal by nearly half, compared with the first quarter.

Such losses, called the 'under-recovery' of all the three firms have fallen to about Rs 11,000 crore in the quarter ending September 2010, from the Rs 20,072 crore recorded in the first quarter, petroleum secretary S Sundareshan has confirmed to FE.

This 45% fall in under-recovery on sequential basis is, to a large extent, due to the free-pricing of petrol at the fag end of the first quarter. Besides, the Indian basket of crude, which was ruling at an average of $78.19 a barrel in the first quarter, has declined by 4% to $ 74.9 a barrel in the second quarter - although it is still higher than $ 68.17 recorded in the second quarter of last fiscal.

On year-on-year basis, crude was 32% dearer in the first quarter and 9.8% dearer in the second quarter. Moreover, it has now moved up to above $80 a barrel from October 1, indicating that the sequential decline may not go too far in reducing the total under-recovery in the full fiscal. The Indian basket of crude was ruling at $82.28 on Friday. The government's under-recovery estimate for the full fiscal is Rs 53,000 crore at a crude price of $75 a barrel, up from last year's Rs 46,051 crore.

Sundareshan said in the second quarter too, one third of the retailers' under-recovery has been compensated by upstream firms by way of discounts while selling them crude. That works out to Rs 3,667 crore. The ministry expects the government to meet the remaining two-third by way of oil subsidy.

IOC chairman BM Bansal told FE that the fuel retailers' second quarter under-recovery was sharply lower at around Rs 6,000 crore, nearly half of the Rs 11,000 crore it recorded in the first quarter. The remaining Rs 5,000 crore losses were shared between BPCL and HPCL. 

The government on June 25 freed the pricing of petrol from its administrative control, hiked the price of diesel by Rs 2 a litre, that of kerosene by Rs 3/litre and the price of LPG was upped Rs 3 per cylinder. The price deregulation led to am immediate increase in petrol's price by Rs 3.5/litre. The OMCs have also undertaken two more smaller price revisions since June 25­ the later one being on Saturday-although they haven't done it exactly in tandem.

Finance ministry sources said they would be in a better position to decide on this year's fuel subsidy in November, when they prepare the revised budget estimates.

Conventionally, under-recoveries (the notional losses on account of selling petroleum products below cost) were managed through a combination of measures: oil bonds, burden-sharing by upstream companies ONGC, OIL and GAIL India through price discounts to OMCs and some absorption by OMCs. Now, petrol price is re-deregulated and the government says it would provide cash compensation to OMCs for their losses instead of the mechanism of oil bonds, for budgetary rectitude.