PSU refiners' fuel sale losses may rise by 5%

State-owned oil refiners will see their losses from fuel sales rise by 5 per cent during the current financial year ending March 2009 after the government decided to decrease prices of petrol by Rs 5 a litre and diesel by Rs 2 a litre.

Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are projected to lose around Rs 1,15,500 crore during the year as they sold petrol, diesel, kerosene and cooking gas at below production costs when crude oil prices rose steadily between April and July this year to reach a peak of $147 a barrel in early July. Before the fuel price cut last week, the three companies were projected to lose around Rs 1,10,000 crore during the year.

When oil prices were at their peak, the refiners were projected to lose Rs 2,45,000 crore from fuel sales during the year.

“This is December already. Since there are just four months to go for the (financial) year, the losses will be minimal. However, the bigger question of making good our piled up losses during the year is more important,” said Sarthak Behuria, chairman of IOC, which supplies over half the fuel the country consumes. “The fact is we will continue to make losses,” he added.

The three refiners reported losses of over Rs 13,000 crore during the quarter ended September 2008 as oil prices soared during the first part of the quarter and then tumbled resulting in loss of value of their inventory.

The share prices of these state-run refiners fell sharply on Friday, in anticipation of a fuel price cut. IOC’s share price fell by over 3 per cent, while those of BPCL and HPCL fell by over 6 per cent each. The benchmark Sensex had dipped by around 2 per cent on Friday. The government had announced the decision to reduce prices after trading had closed for the day.

With prices of petrol and diesel being slashed by the government, the state-owned refiners’ profits on petrol will fall to Rs 10 per litre, while that for diesel will dip to Re 1 per litre. “The important thing is that the companies will continue to make profits on automobile fuels. And with oil prices projected to fall further, the profits on these two fuels can rise again, while losses on kerosene and LPG can fall further,” said a Mumbai-based analyst who tracks the oil sector.

The companies, however, continue to lose around Rs 17 for every litre of kerosene they sell and around Rs 140 for every cylinder of cooking gas.

“We were losing Rs 5 crore every day before the price cut. Now that loss will increase. Our performance for the rest of the year will depend on how oil prices move,” said GC Daga, director (marketing), Indian Oil.

Officials of the refiners and analysts tracking the companies say the losses of IOC, BPCL and HPCL in the current quarter ending December 2008 will be accentuated by the sharply lower refinery margins (or the difference in prices of the products they sell and the crude oil they buy). “Margins have even become negative for some products like naphtha and petrol,” said an official with BPCL, the country’s second-largest crude oil refiner.

These companies are also projected to lose value in their inventories. They pay for the crude oil they import at the time of the oil consignment leaving the seller country’s shores. It takes around 14 days for the oil to arrive in India and another week to be refined and sold to consumers. As oil and oil product prices fall sharply, the value of these companies’ stocks also dip.