India’s oil marketing companies make Fortune 500 list despite losses
India’s top oil marketing companies (OMCs) have been plagued with heavy losses due to governmental regulations that control fuel prices. While these firms are listed in Fortune 500, they have struggled to cope with the effects of the price control on diesel, and have no choice but to sell fuel at a loss. It is generally believed that the price control is related to the forthcoming elections.
Under the diesel price cap rule, the government should compensate the oil companies for revenue losses incurred; however, the Finance Ministry does not have the funds. The budgeted amount this year was used to cover the compensation for losses incurred during the previous year. While government deregulated the price of petrol, the oil companies were not free to fix their selling price without the approval of the ministry.
Losses for the sale of petrol at a low price are not compensated because of “deregulation,” leading oil firms to think that it would be better to regulate petrol prices, so that they can claim for compensation for their losses.
Indian Oil Corp. (IOC) Chairman R.S. Butola said the company has no choice but to set up loss-making retail outlets. He has seen his company’s borrowings rise to a staggering Rs95,000 crore (US$17.1 billion) in September. Butola said he is not allowed to invest in new projects but is required just to keep operations going in the face of heavy losses.
Industry observers say that these companies are managed professionally, and have thus been able to supply the country’s fuel needs, including requirements in the most remote regions. R.S. Sharma, former chairman of Oil and Natural Gas Corp. (ONGC), said the dismantling of the Administered Price Mechanism brought about the sad state of affairs, although the government’s move was supposed to have helped them, as reflected in share prices which went up in 2002. However, the present pricing policy has disastrous effects on the bottom line of the oil companies. It has also negatively affected the automobile market, since consumers are quickly switching to diesel-run cars.
The combined borrowings of three companies (IOC, Bharat Petroleum Corp. Ltd. and Hindustan Petroleum Corp. Ltd.) rose to Rs127,000 crore (US$22.8 billion) in March. Their combined net loss in the first quarter is more than Rs 40,000 crore (US$7.2 billion). This includes the highest-ever loss in India’s corporate history incurred by IOC. Companies report losses if the government does not compensate them, company executives said. Last year, government compensation enabled them to post a combined annual profit of Rs 21,000 crore (US$3.8 billion), after reporting losses in the first two quarters. Rating agencies know that government bailout will eventually come, so the oil companies have not been given junk status. However, government compensation is not about to be given soon, as it has to wait until the supplementary grants are approved by the parliament, which could take place possibly in the winter season.
Meanwhile, the government announced in September the highest-ever increase in diesel rates and cut excise duty on petrol by Rs5.30 a liter (US$0.10), giving a respite to the oil firms. Earlier in May, oil companies stunned motorists when they raised petrol prices by Rs7.50 per liter (US$0.14).
Top company and government officials agree that refiners have an urgent need for resources to expand production capacity to meet the country’s energy needs, which are expected to keep rising. The companies need to achieve profitability so that they can invest in expansion projects. Concerns have been brought to parliament about oil companies resorting to manipulation of revenue-loss figures, also called under-recovery, in order to make huge profits. There have been demands that companies should be allowed a fixed rate of return, which state oil companies say they would welcome, instead of having to battle with the politics of fuel pricing and uncertain government compensation. (October 8, 2012)
