Even as private sector oil retailers such as Reliance Industries Ltd up the pitch of their lobbying to get the government to make up the losses they suffer from operating in a market where price is controlled, a state-owned company that receives such compensation says it may have to shut shop next month because the nature of these subsidies will leave it with no cash.
Bharat Petroleum Corp. Ltd, or BPCL, says it can no longer absorb the losses it suffers on account of having to sell petroleum products at a government-mandated price. The government’s compensation, the company added, is neither adequate, nor timely.
“We are running out of cash very fast. By April we will have a cash crisis and no cash for day-to-day operations. I have a capital expenditure of Rs2,500 crore lined up for the first quarter of the next financial year (2008-09). This kind of fuel pricing can’t go on in perpetuity,” said Ashok Sinha, chairman and managing director, BPCL.
“We are facing a daily loss of Rs65 crore by charging less on the sale of petrol, diesel, kerosene and liquefied petroleum gas,” Sinha added.
The compensation package worked out by the government, which is fiscal neutral to the Centre, as reported in Mint on 25 February, entails issuing oil bonds to the companies. The total oil bond allocation for oil marketing companies such as Indian Oil Corp. Ltd (IOC), Hindustan Petroleum Corp. Ltd (HPCL) and BPCL for 2007-08 is around Rs20,554 crore. Of this, Rs9,296.92 crore worth bonds that were long overdue were issued by the finance ministry on Friday. They mature in 2025 and carry an interest rate of 8.4%.
“Issuing oil bonds alone will not help. Where do I get the money for Bina refinery, work for which is on? We are also yet to pay the money for the oil blocks that we have acquired overseas,” Sinha added. BPCL will receive Rs2,078.92 crore of oil bonds issued on Friday.
The total investment required for the Bina refinery is Rs10,300 crore, of which Rs6,300 crore will be debt and the balance, equity.
Due to overall fiscal constraints, the government has delayed the issue of oil bonds. And public sector oil companies are only partially compensated for their losses.
With crude oil trading at around $100 a barrel , the total under-recoveries of government-owned oil marketing companies in 2007-08 is expected to be around Rs70,968 crore. Of this amount, the government will underwrite 57% by issuing oil bonds; exploration and production firms such as Oil and Natural Gas Corp. Ltd and Oil India Ltd will contribute 33%; and 8.76% will be absorbed by the oil marketing companies themselves.
“All oil marketing companies are running into trouble. Unless (fuel) prices are increased further, there will be a substantial impact on their working,” said Ravi Mahajan, partner at audit and consulting firm Ernst and Young. Petroleum and natural gas secretary M.S. Srinivasan said the government’s populist policies on fuel pricing were acting as a handicap for the oil sector as reported by Mint on 16 February.
The government may not be able to increase prices any further any time soon because several key states are to go to polls this year. It recently rai-sed petrol prices by Rs2 a litre and that of diesel by Re1.
Meanwhile, private sector oil retailers want the government to extend similar subsidies to them. Although these firms are free to set their own prices, they cannot price their offerings substantially higher than the state-owned firms which dominate the oil retailing business.