PETROLEUM INDUSTRY: Under-recovery in Q3 to Make Matters Worse

The cost of India’s imported crude oil has reached a historic high level on the depreciating rupee. As retail prices remain controlled, the money that India’s state-run petroleum retailers are losing has gone up at a dizzyingly rapid pace. These three companies — Indian Oil, BPCL and HPCL — are already neck-deep in debt and badly in need of compensation from the government.
In December 2011, India’s average cost of imported crude oil stood around . 5,673 per barrel — 8.2% higher since April 2011 — although in dollar terms, the price of India’s crude basket eased 8.7% to $107.9. According to the data published by the Petroleum Planning and Analysis Cell (PPAC), in the last week of December 2011, India’s cost of import stood at. 5,683 per barrel — surpassing the earlier peak of . 5,675 in July 2008, when oil prices had reached $147.
As the import cost reaches a historic high level, it is no wonder then that retailers are losing heavy money. The industry, which lost money at the rate of . 235 crore per day during the second quarter, is losing . 388 crore every day in the second fortnight of December — a jump of 65% in three months. The industry is expected to report total under-recovery of . 30,000 crore for Q3, which will be 40% bigger than the September 2011 quarter. The total under-recoveries had fallen to . 21,374 crore in the September 2011 quarter from . 43,526 crore of June 2011, thanks to decontrol of petrol and reduction in taxes in the last week of June. The heavy under-recoveries have put the cash flows of the oil marketing companies under strain. The borrowings of all these three companies have jumped nearly 48% in the last 12 months to . 129,283 crore at September 2011. In the first six months of FY12, these companies have been borrowing at an average of . 180 crore per day. Their debt-to-equity ratio has worsened to 1.7 for Indian Oil, 3.0 for BPCL and 5.1 for HPCL. Similarly, the combined interest burden of these three OMCs has zoomed up 93% in the first half of FY12 to . 3,877 crore.
As the rupee continues to depreciate, the urgency grows to find a lasting solution to the subsidy problem. Meanwhile, the sector remains highly unattractive to retail investors, as the government appears paralysed by its political compulsions and lack of economic leeway.