Oil marketing firms in the dock

The problem is well-known: the oil marketing PSUs are selling petrol, diesel, LPG and kerosene at a much lower price than the market as the government has not allowed them to revise prices in keeping with the global flareup in crude and product prices.

IOC estimates it may end the April-June quarter with a net loss of Rs 1,800 crore, while BPCL’s and HPCL’s estimates are Rs 1,300 crore and Rs 1,030 crore, respectively.

The government is aware of the grim situation. According to petroleum secretary S.C. Tripathi, ‘‘A contingency plan is being worked out to reduce the losses for the oil marketing firms’ it’ll be firmed up by July 15.’’

A formula is being worked out between upstream firms (ONGC, GAIL and OIL) and the refineries (like MRPL and Reliance), which will share the burden of the marketing firms’ Rs 4,000 crore loss by giving the latter discounts.

And there lies the paradox: upstream firms like ONGC are reaping the benefits of high international crude prices as they are getting import-parity pricing from refineries. ONGC’s net profit in the last quarter of 2004-05 jumped up by 91.2 per cent.

Further, refineries are also getting a high margin thanks to this import-parity formula. While for Reliance the refinery margin is around $7 per barrel, for the other refineries it $6 a barrel.

The refineries will put in Rs 1,000 crore, and around Rs 3,000 crore will be shared by ONGC, GAIL and OIL. ONGC will pump in around 90 per cent of this amount. Officials in the petroleum ministry say even after this, HPCL and BPCL will face small losses while IOC will go into the black.

IOC, HPCL and BPCL officials agree their fate depends on this contingency plan. Says IOC CMD S. Behuria: ‘‘It is a serious matter and we are working to avert the situation.’’

However, the formula may not be easy to push through since there is a lot of resistance from the upstream firms. Senior officials in ONGC asked, ‘‘Why transfer profit of one company to another. Why should we accept this?’’

GAIL CMD Proshanto Banerjee has already written to the petroleum ministry stating that GAIL should not bear under-recovery on kerosene as the company does not produce the product. Not to speak of MRPL and Reliance, whose opposition to the burden-sharing formula is more than obvious.

According to experts, apart from government intervention, the problem lies with the present pricing system. According to Sanjay Kaul, director in Indian School of Petroleum, three things are wrong with the present system. ‘‘We have government-controlled pricing. We have no price for the marketing firms but supply cost. And we also have unregularised tariff which gives high refinery margin and windfall to ONGC.’’ This needs to change.

Ministry officials agree. They are trying to work out a long-term pricing system of export-parity system instead of import-parity. ‘‘Since customs duty will not be loaded, there will be at least 3 to 4 per cent relief for the marketing firms while the margin for the refineries will come down by the same amount. But this will take longer to work out and hence the immediate contingency plan,’’ the official added.

At present, the under-recovery in petrol is Rs 2.25 per litre and around Rs 4.69 a litre for diesel. Further, the oil marketing firms are making a net loss of Rs 130 on sale of every LPG cylinder and over Rs 11 on every litre of kerosene.

Last month, the government for the first time, allowed state-owned oil firms to partially align domestic petrol and diesel prices with cost but the freeze on kerosene and LPG prices continued.