OMCs to face double whammy

By Nayantara Rai, CNBC-TV18

Oil marketing companies already under a cash crunch face further squeeze, and that is because the Finance Ministry has pared the under recoveries to just Rs70579 cr down from the earlier estimate of Rs77000 cr and by just covering 50% of this through bonds, these OMCs face a double whammy. HPCL for example is expected to absorb an additional Rs 3,000 crore in FY08 as against Rs 770 crore in FY07.

The bond issuance by the Finance Ministry only covers effectively 45% of the estimated under recoveries and of this sources say HPCL will receive 21% of the oil bonds or Rs 7,413 cr. While BPCL will receive 23% or Rs 8119 crore and IOC will get the remaining Rs 19768 crore. Though the OMCs are tightlipped about their financials, sources have told CNBC TV18 that all the OMCs expect their profitability  to be severely dented in the fourth quarter.

Sources in the Petroleum Ministry have told CNBC TV 18 that a new subsidy sharing formula is in the works. The new formula will ensure that upstream companies like ONGC and GAIL do not come under financial stress because of the discounts that they will be asked to fork out.

As per the existing subsidy arrangement, upstream companies pay 33% of under recoveries. This would mean Rs 62,700 cr on the projected 1 lakh 90,000 crore rupees of under recoveries at current crude levels.

But with the Finance Minister not keen to tweak the duty structure on petro products and a price hike ruled out for now even as crude surges towards the 130 dollar mark,a subsidy sharing formula may just be a non starter.