Public sector oil refiners are "delighted" with the Centre's move to hike fuel prices especially when it means that combined losses at the retail end are down by over Rs 20,000 crore.
"We only expected petrol and diesel prices to change but the fact that LPG and kerosene (prices) have also been increased has far exceeded our expectations," an oil sector executive told Business Line. This is because, like diesel, kerosene accounts for a considerable portion of total fuel losses.
However, amidst this euphoria, there is some concern largely related to the compensation mechanism. For 2009-10, the Oil and Natural Gas Corporation squared up the refiners' petrol and diesel losses while the Centre made good a large chunk of the losses on LPG and kerosene. The trio of IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation absorbed a small part of these fuel losses.
The Centre has now indicated that it is working out a compensation mechanism for this fiscal, to cover the losses projected at Rs 53,000 crore after the price hike. As is the norm, it will be a formula where the upstream oil companies (led by ONGC) and the Finance Ministry share the burden.
The bigger question relates to the fuel losses in the April-June quarter of this fiscal, projected at around Rs 18,000 crore for IOC, HPCL and BPCL. Sources say that nearly Rs 1,000 crore could be shaved off for the remaining week in this month, thanks to the price hike, which still leaves a balance of Rs 17,000 crore to be covered.
Of this, petrol and diesel losses alone would be over Rs 10,000 crore, with LPG and kerosene taking up the balance. The refiners are hoping that ONGC, along with Oil India and Gail (India), make good the petrol and diesel losses while the Centre squares up losses incurred in the other two fuels.
"If no initiative is taken, we could be incurring huge losses in the first quarter. Hopefully, some compensation formula will be in place soon," an oil industry official said.
It also remains to be seen if the Centre will bear two-thirds of the losses for the future, as is widely believed, with the ONGC-led upstream combine taking care of the balance one-thirds.
Sources say that "anything can happen," where even the refiners may end up absorbing a part of these losses as has been the case for some years now. Thus far, these losses have totalled over Rs 80,000 crore for IOC, HPCL and BPCL.
The other area of concern relates to the Centre's clear message that it will step in if crude price movements show a lot of volatility, as was the case in 2008-09 when they touched a peak of $147 a barrel. In fact, the first two months of this fiscal saw crude at an obstinate $80/bbl, till the crisis in Europe led to a fall only to recover to $77/bbl levels lately.
Price level
What then will be the price level when the Centre chooses to intervene? Officials at the oil PSUs believe this could happen if crude crosses the $90/bbl mark, which is inevitable in the coming months. "It will be a pity if the process of deregulation is arrested as a result," one of them said.
Even while there is no denying the fact that this is a historic day for the oil sector (since the time total deregulation was suggested by the Sundararajan committee way back in 1995), it remains to be seen if diesel will actually be freed of price control.
Equally, there is no telling if the refiners will be allowed to increase petrol prices beyond what is perceived as the level when it begins to hurt customers' pockets.