Petrol pricing may officially be out of the government's control, but a veiled intervention by the government has resulted in Indian Oil Corp and other state-run oil marketing firms Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) differing on what is the best solution. BPCL and HPCL see IndianOil's call for moving into a price control regime as a "retrograde step".
The government's fuel pricing policy led IndianOil, India's largest oil marketing company, to post the biggest-ever quarterly loss at Rs 22,451 crore in the April-June period. While the oil marketing companies are compensated for revenue losses on diesel, cooking gas and kerosene, they are forced to take losses on account of petrol on their books.
Last week, R S Butola, chairman and managing director of IndianOil, said the company would make a strong case for bringing petrol prices under the government control once again though he empathised with the government by stating: "Inflation is high, and we understand the government's position. We don't want the customers to suffer."
Despite being on the same boat, BPCL thinks otherwise. "If you bring petrol back under the administered pricing mechanism, for a long time prices may remain static. The intention should be to move towards market-driven price rather than going for regulation, which in my opinion will be a retrograde step," said R K Singh, chairman and managing, BPCL.
Higher underrecoveries led BPCL to report a nearly threefold increase in its June quarter loss at Rs 8,837 crore. The company had posted Rs 2,562 crore during the corresponding previous quarter. It incurred Rs 3,524 crore losses for selling fuel below cost.
HPCL, too, posted a loss of Rs 9,249 crore during the April-June quarter against a loss of Rs 3,080 crore in the corresponding previous quarter. "Going back to the administered pricing mechanism may not be a very good decision. This kind of losses is not sustainable," said a senior executive from HPCL on condition of anonymity. S Roy Choudhury, chairman and managing director of HPCL, could not be contacted for his views despite repeated calls. HPCL's under-recoveries on sale of petroleum products stood at Rs 7,321 crore during the quarter.
With underrecoveries mounting, oil marketing companies have to increasingly resort to borrowings since the compensation from the government is late. IndianOil's borrowings are at Rs 90,000 crore against its maximum limit of Rs 1.1 lakh crore. "There was no budgetary provisions made for the unmet under-realisation. We are waiting for the government to present supplementary demand for grants," said Butola.
At present, IndianOil is losing Rs 20 crore a day in petrol sale, but post-June 2010, when petrol was decontrolled on paper, the government has stopped compensating for the fuel. However, the finance ministry, in instalments, fully compensates the under-recovery (the difference between the selling price and the actual price of a commodity) on other petroleum products, such as diesel, kerosene and cooking gas. At the current prices, the total under recoveries for the three oil marketing companies on the sale of diesel, liquefied petroleum gas (LPG), kerosene and petrol is around Rs 1.77 lakh crore, of which Rs 6,800 crore would alone be on the sale of petrol. "If the government can pay Rs 1.7 lakh crore, because the price of those products are under control, it would be better for us to have the price of petrol under control and get compensation for that as well," Butola had said last week at a press conference.
BPCL's borrowings, too, have gone up to Rs 25,000 crore against its maximum limit of Rs 30,000 crore. "If we do not get the compensation now, the borrowings are only going to go further up. Our limit of Rs 30,000 crore can be reached if the compensation is not announced or cash is not reimbursed to oil companies," said Singh.
Singh added when the government was talking about de-regulation of LPG and diesel, partial or otherwise, getting back to the administered pricing mechanism would not allow price increases to be automatic and the oil companies would have to go through various decision making process.
"If we allow prices to go up on a regular basis and not allow it to accumulate, the customer will not feel the impact as it is felt at present. As if you don't increase the price for a long time, suddenly the increase feels very significant. That is when one feels the pinch," added Singh.