Oil companies' net worth will be negative without subsidies

The finance ministry has hit another nail in the proverbial coffin of oil marketing companies.

On Wednesday, when a news report suggested that there would be no further subsidies for oil companies in April-September, oil stocks fell sharply on the bourses. While BPCL closed 4.89 percent down at Rs 514.45 on the Bombay Stock Exchange, HPCL was down by 4.36 percent to Rs 277.35 and Indian Oil by 2.32 percent to Rs 269.30.

According to a calculation made recently, the three oil companies were likely to post under-recoveries (losses) of over Rs 1,30,000 crore if they didn’t receive subsidies this year. This value was based on a rupee value of Rs 48 to the US dollar. Since then the rupee has already depreciated to Rs 53.68. Analysts are now pegging the loss number to be around Rs 1,80,000 crore.

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[caption id=“attachment_156283” align=“alignleft” width=“380” caption=“Indian Oil has said that it is likely to incur a loss of Rs 73,605 crore for the year. Reuters”]  [/caption]

The three OMCs (oil marketing companies) have collective net worth of Rs 86,923 crore. Even if we take the lower loss figure of Rs 1,30,000 crore, the net worth of all these companies will be eroded.

Indian Oil has said that it is likely to incur a loss of Rs 73,605 crore for the year. The company has a net worth of Rs 57,575 crore. RS Butola, chairman, told a recent press conference that the company was losing Rs 227 crore every day by selling diesel, kerosene and domestic LPG at below market rates.

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The OMCs lose Rs 13.53 on the sale of every litre of diesel, Rs 29.99 on a litre of kerosene and Rs 287 on the sale of a 14.2 kg LPG cylinder.

In 2010-11, the government provided Rs 44,371 crore to the OMCs through cash assistance, freight subsidy and natural gas subsidy. However, with crude oil hovering around $100 a barrel and with the rupee depreciating, the OMCs are finding it difficult to raise money for crude imports.

Ironically even though the government claims it cannot raise prices as it will affect the population at large, it collects more money in the form of taxes than it shells out as subsidies. Minister of State of Petroleum and Natural Gas RPN Singh said in a written reply to the Rajya Sabha on Tuesday that the petroleum and natural gas sector has contributed Rs 1,92,577 crore to the exchequer in the form of taxes in 2010-11. The sector has contributed Rs 136,497 crore to the national exchequer and Rs 88,997 crore to the state coffers.

Hence even though the sector is crying foul over the rejection of subsidies to oil companies, it is actually minting more money which is taken away by the government in the form of taxes.