The sharp 25 percent decline in crude oil prices to $92 a barrel against $125 in April has pulled down revenue losses, or under-recoveries, of oil companies on the three regulated products — diesel, kerosene and domestic liquefied petroleum gas (LPG) - by as much as 35 percent in the last three months.
In April, the three oil marketing companies — IndianOil, Bharat Petroleum and Hindustan Petroleum — were losing Rs 563 crore a day on these products. The losses as on 3 July 2012 are down to Rs 355 crore, providing major relief to these companies which depend on borrowings to fund the under-recovery, as compensation from the government comes with a lag.
However, the OMCs believe that the fall in crude is nothing much to cheer about as the rupee depreciation wipes out some of the gains of a price decrease.
According to a report by ICICI Securities, "under-recovery" estimates have fallen to Rs 1,52,000 crore in 2012-13, well below the Rs 2,00,000 crore expected at the beginning of April. This could further decline to Rs 1,32,400 crore if prices of diesel and LPG are raised.
The report said HPCL and BPCL are the major beneficiaries of the decline in crude prices, while ONGC and GAIL gain from the decline in terms of the reduced burden of subsidies they have to bear.
The Indian basket of crude oil averaged at $118 a barrel in April and $108 a barrel in May. However, it fell to an average of $96 in June and currently stands at $92.08, the lowest since April last year.
The government should use this pricing advantage and push through deregulation of diesel prices and increase prices of other subsidised products.
Oil marketing companies are currently incurring losses of Rs 9.13 a litre on diesel, down from Rs 14.36 in April, Rs 13.91 in May and Rs 12.5 in June. Under-recovery in kerosene is down to Rs Rs 27 a litre in July from Rs 30.53 in June. It is Rs 319 for domestic LPG, down from Rs 396 in June, Rs 480 in June and Rs 570 in May. Additionally, the government provides a subsidy of Rs 0.82/litre on kerosene and Rs 22.58 on LPG.
The government has provided around Rs 40,000 for subsidies for the year but this is inadequate as Rs 38,500 crore has already been expensed as additional subsidy payments to OMCs for FY12 - i.e. last year. According to an HSBC report, government borrowing would need to increase by Rs 72,600 crore for it to contribute just 56 percent of total under-recovery in FY13.
However, it looks like oil marketing companies will continue to lose half their marketing margins since any structured deregulation in fuel pricing in the near term looks unlikely, given India's political situation.