How are oil firms reading the fuel price hike?

Bringing some respite to the bleeding oil marketing companies, the Empowered Group of Ministers on fuel, which met today, announced a Rs 3 per litre hike in prices of diesel. It has also increased the rates of kerosene by Rs 2 a litre and LPG by Rs 50 per cylinder. (Read more here)

This move will bring down OMCs' under-recoveries to the extent of Rs 21,000 crore. Currently, prices of fuel are below market rates thus OMCs incur a loss of Rs 15.44 per litre on diesel, Rs 27.47 a litre on kerosene and Rs 381.14 per LPG cylinder. Their total under-recoveries stand at Rs 1,71,140 crore.

With this move, BPCL's under-recoveries will come down to Rs 11,300 crore on an annual basis from the current Rs 41,000 crore, said its director finance SK Joshi. "A Rs 3 per litre hike in diesel prices will result in our net retention of about Rs 2.67 per litre and the excise reduction will result in a gain of 2.60 per litre. So this will reduce our under-recoveries in diesel by roughly Rs 6 per litre."

According to PK Goyal, director finance of IOC, "The industry's under-recoveries will come down by roughly Rs 1,700 crore for the balance period of nine months and the under recovery will come down by roughly Rs 3,600 crore."

The EGoM has also announced a 5% cut in custom duty on fuel products. Customs duty on diesel has been cut from 7.5% to 2.5% while the 5% customs duty on crude has been abolished. It has also reduced excise duty on diesel to Rs 2 from Rs 4.60 per litre.

On account of this the government would bear a revenue loss of Rs 49,000 crore for the full fiscal year (FY12). This, AK Hazarika, chairman of ONGC, is a bold decision. "Total under-recoveries of upstream companies will reduce, with a subsequent impact on their subsidy burden, which too will come down."

Hazarika says in the first quarter Rs 44,000 crore was the total burden. Against that, ONGC, he says, had to pay nearly Rs 11,800 crore.

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