Govt to soon clear compensation for OMCs’ LPG losses

OMCs have reportedly incurred cumulative LPG under-recoveries amounting to approximately Rs 30,000 crore in the current financial year (April-December 2024).

The finance ministry is likely to soon approve the compensation for under-recovery by OMCs (oil marketing companies) on the sale of LPG  cylinders, government sources told Moneycontrol.

The sources added that a meeting of the Expenditure Finance Committee (EFC) was held on March 21 to discuss the compensation framework for OMCs, which have suffered significant financial strain due to high international LPG (liquefied petroleum gas) prices.

In April 2024, Saudi Aramco butane prices had climbed around 14 percent to $620 per metric tonne (mt), compared to $545/mt in the same period last year. In December 2024, butane prices were at $630 per mt.

The meeting was chaired by the Expenditure Secretary and attended by the Petroleum Secretary, along with other senior officials from both ministries.

Government sources said that the compensation proposal is likely to be discussed by the union cabinet soon. After the union budget failed to address the ask of the oil companies, senior oil ministry officials had told Moneycontrol that compensation for LPG under-recovery could be taken up afterwards by the cabinet. The cabinet meeting is expected later this week.

Financial strain

OMCs have reportedly incurred a cumulative LPG under-recovery of about Rs 30,000 crore in the current financial year (April-December 2024), driven by elevated international fuel prices. Given the financial strain, the oil ministry had approached the finance ministry ahead of budget 2025, seeking compensation to mitigate these losses. However, no announcement was made in the budget, presented by Finance Minister Niramala Sitharaman on February 1.

"Given the revenue impact on oil marketing firms, a decision is expected soon," the source said. The state-run OMCs include the Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL).

The last such compensation was granted by the union cabinet in October 2022, when the centre announced a payment of Rs 22,000 crore for state-run OMCs, for a cumulative loss of Rs 28,000 crore that they had incurred. International LPG prices had surged up to $960 per mt in April 2022, leading to significant losses for OMCs. Global LPG prices had climbed around 300 percent in 2022 compared to 2020, on account of the Russia-Ukraine war.

Referring to OMCs as “good corporate citizens,” Petroleum and Natural Gas Minister Hardeep Singh Puri had earlier told Moneycontrol that the government had reimbursed OMCs for LPG under-recovery earlier (in 2022) and would do so this year as well.

Elevated global prices

Amid higher demand for butane and propane globally, international LPG prices have shot up recently. LPG is made of two components — 40 percent propane and 60 percent butane.

In the first nine months of the current financial year, IOCL has reported under-recovery of Rs 14,325 crore on the sale of LPG cylinders, while BPCL and HPCL have reported under-recoveries of Rs 7,228 and Rs 7,599 crore, respectively.

As OMCs kept cylinder prices unchanged despite high global prices of the fuel, the huge LPG under-recovery has hit their bottom line. The country is dependent on imports for the majority of domestic LPG consumption.

Compensation approval

The EFC, a crucial decision-making body within the Finance Ministry, evaluates government expenditure proposals — especially those exceeding a certain threshold — before they are taken up for final approval.

According to the source, the March 21 meeting discussed the financial burden of OMCs and the need for government intervention. Timely compensation is critical, as it enables the OMCs to sustain their operations without passing on the cost to consumers.

The OMCs have been absorbing the price difference between domestic LPG rates and international costs, as retail LPG cylinder prices remain regulated.

Experts suggest that such compensation decisions limit the government's fiscal space. "Geopolitics  can affect the fiscal arithmetic. Random variables like energy price volatility are beyond the purview of the finance ministry, and we cannot blame the ministry for such forecasting errors. It is important to find room to accommodate such randomness," National Institute of Public Finance and Policy (NIPFP) Professor Lekha Chakraborty told Moneycontrol. She added that while better forecasting models can address biases, external factors like volatile fuel prices inevitably strain budgetary planning.