Shares of oil marketing companies corrected sharply as the oil ministry today gave in-principal nod to export parity pricing model for petroleum products, which is likely to result in huge losses for these oil retailers.
Earlier Aakansha Sethi of CNBC-TV18 reported that Petroleum minister Veerappa Moily has agreed to price petroleum products using export parity as proposed by finance ministry to cut down government's oil subsidy burden.
Finance minister P Chidambaram, petroleum minister Moily and the PMO met earlier today to discuss the issue of export parity pricing of petroleum products. For the last several months, the finance ministry has been demanding oil companies to move towards export parity away from trade parity. However, the proposal was rejected by the oil ministry on grounds that the oil marketing companies (OMCs) would lose too much money and that their balance-sheets would be severely weakened.
According to sources OMCs could suffer losses of Rs 18,000 crore on switching to export parity pricing.
It now remains to be seen how and when export parity pricing is implemented. The government has still not worked out a roadmap for implementation of export parity pricing.
Export parity pricing basically means that oil products will now be priced using export prices instead of existing model of using import prices. Import prices included import duties on crude, and other transport cost which led to higher prices, causing higher under recoveries, leading to higher subsidy burden for government. As import duties will now not be included in this, the under recoveries will be lower, which will mean that the government subsidy burden will reduce. Government has been trying to control subsidy bill to rein in the high fiscal deficit.
While this may be good news for the government, OMCs will have to work on alternative sources of revenues, and on higher efficiencies and gross refinery margins as lower petroleum product prices will directly impact their revenues.
Sources said that private refiners like Reliance Industries and Essar Oil are also likely to get hit if export parity prices are implemented. RIL’s profit before tax is seen taking a hit of Rs 2,500 crore for 10.5 mt diesel sold to OMCS, while Essar Oil’s profit before tax is seen down by Rs 1860 crore for 7.5 mt diesel it sells. Shares of RIL were trading down 1 percent at Rs 818.70 and Essar Oil shares were flat at Rs 80.40.