Refining profitability will be hit due to duty hikes: IndianOil
New Delhi   02-Mar-2010
Budget 2010 may not go down too well with the oil and gas sector. Subsidy on petroleum products will be disbursed as cash to oil marketing companies (OMCs). There was no additional allocation made in the Budget. About Rs 12,000 crore has been disbursed as cash subsidy. The Finance Minister has confirmed that there will be no oil bonds given in FY11. Also, there will no cash provisions made for FY11 under-recoveries. The 5% basic customs duty on crude petroleum has been restored. Moreover, central excise tax on petro products has been hiked by Re 1 while non-petro products will see a levy of 10%. Commenting on the lower subsidy provision, Mr. S. V. Narasimhan, Director-Finance of IndianOil, the country's largest oil marketing company, said there was no concern on the quantum of subsidies. “The subsidies may be reviewed on regular basis.” However, he said, refining profitability will be impacted due to duty hikes. <b>Below is the edited transcript of Mr. S. V. Narasimhan’s exclusive interview on CNBC-TV18. Also watch the video.</b> <font color = #65000><b>Q: The subsidy provision in the Budget for oil companies is vastly lower this time. How do you think this will work out for companies like yours? Does it worry you?</b></font> A: Actually this subsidy provision in the Budget is what they have been providing all along in the normal course for LGP and kerosene. The under-recoveries, which are assessed on year-to-year basis, which has been given separately by way of oil bonds and nowadays from the cash subsidy in 2009-2010, that will be provided as and when it is assessed and the decision is taken. There is no concern as such because there maybe supplementary in the Budget will always be provided just like it was provided in 2009-10 revised estimate. So that is not a real concern but it will be assessed on quarter-to-quarter basis or some assessment will be made through the course of 2010-2011 and some provision will be made. <font color = #65000><b>Q: Can you walk us through how much you will continue to lose on petrol and diesel and also how much your gross refining margins (GRMs) may potentially be hit by because of customs duty increase?</b></font> A: The refining sector is really concerned with the customs duty because as far as the marketing is concerned, the customs duty, which is levied on the products have been passed through. But as far as the refineries are concerned, they pay duty of 5% on the entire crude. But not on all the products 5% increase has taken place and some products which are attracting nil duty like LPG, kerosene, ATF, naphtha for fertilizers, there is nil duty and so there is no increase in duty structure. In case of furnace oil, the 5% increase has taken place. Eventually from 100 tonnes of crude you get 90 tonne of products and some other products are exempted. So really they do not get fully production on their duties. There will be a hit on the refining sector. <font color = #65000><b>Q: Let me just walk you through what the market is estimating at this point. They see that oil marketing companies like yours will continue to lose about Rs 4 per litre on petrol and diesel and your GRMs may be hit to a tune of a dollar to a barrel. Would that be your fair estimate?</b></font> A: As far as petrol and diesel is concerned, the existing under-recoveries continue. Whatever has happened in the Budget has been passed through. So the existing under-recoveries, which have been in the range of as you said around Rs 4 petrol and all, will continue. As far as GRMs is concerned, it will vary from refinery-to-refinery. <font color = #65000><b>Q: You have seen the hue and cry around the fuel price hike. Does it tell you that after this round of diesel and petrol hikes, it will be very difficult for the government to implement any part of the Kriti Parikh committee report, which envisages or builds in some further hike in fuel prices? Do you think it is unlikely?</b></font> A: It is already mentioned that Kirit Parikh report is under consideration by the government. To what extent it will be implemented and to what extent it can pass on the consumers, the government will take a decision on that. As far as we are concerned these are regulated products and we are governed by the government’s decision on this and we implement the government decisions. So whatever decisions are there, if increase is there it is good otherwise the compensation mechanism will be in place for compensating under-recoveries. <font color = #65000><b>Q: That is the point because now there are no oil bonds as the Finance Minister said. So it is all going to be a cash hand out to the oil companies and he has not provided for that in the Budget. Is there something that you heard from the Oil Ministry or the Finance Ministry suggesting that over and above what has been provided in the Budget there will be ad hoc payments on a quarterly basis in cash to compensate you or is it your surmise or you are assuming that has to be the case otherwise you will find it very difficult to operate?</b></font> A: As I said that under-recoveries assessment is always done by the government in the beginning of the year some time May-June. Last year also it was there in the month of June-end and based on that decision government takes a view on how to compensate the oil marketing companies. The process will continue even in this year. After all, Oil marketing companies, we are implementing the government decisions and any under-recoveries on this account we are sure that the government will be compensating us in one form or other. <font color = #65000><b>Q: But they have shut the book on FY10 with Rs 12,000 crore as a cash subsidy. Have you any intimation from government on whether some of the upstream companies ie ONGC may actually have to make up for your losses and have to shell out a bit more?</b></font> A: We are only taking with the government that Rs 12,000 crore under-recoveries provided in the Budget will not be sufficient for oil marketing companies. The estimated under-recoveries on LPG and kerosene is close to about Rs 31,000 crore. So remaining close to about Rs 19,000-20,000 crore is under covered. <font color = #65000><b>Q: So this is a very large amount and we would request the government support for increasing the compensation amount. How do they do it exactly?</b></font> A: I will not be in a position to say because the decision will be taken by the government with consultation of Minister for Petroleum and the Minister of Finance.