IOC asks govt to compensate OMCs on quarterly basis

PK Goyal, director finance, Indian Oil Corporation (IOC) says that the oil major has asked the government to compensate oil-marketing companies on a quarterly basis. "We are currently incurring revenue loss of Rs 1.37 per litre of petrol sales," Goel told CNBC-TV18 in an interview. 

IOC reported a whopping loss of Rs 22,451 crore for the June quarter, the biggest by any Indian company. While the delay in compensation for under-recoveries from the government took a toll, the inability to raise retail fuel prices is making things worse.

Goel says petrol has been deregulated, but the PSU is not being able to raise prices. IOC, Hindustan Petroleum Corp and Bharat Petroleum Corp are compensated by the government for selling diesel, kerosene and cooking gas at government-fixed prices. They aren’t for petrol since June 2010, when the government allowed the refiners to fix petrol prices. However, they still have to get the government’s approval to raise prices.

"The environment is not conducive for a petrol price hike," Goel said adding, the company has written the government on petrol under-recoveries and its "unsustainable" USD 16 billion debt. 

IOC sees FY13 under-recovery at Rs 1.8 lakh crore at current prices. "We would resist compensation through oil bonds," Goel said.

On the positive side, Goel said, rupee stability and gross refining margin improvement will be a positive for the second quarter. "We are hopeful of cash compensation approval in monsoon session," he said. 

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee.

Q: There has been some suggestion from New Delhi that you could even be overstating your losses and under recoveries in order to claim compensation. Would you want to comment on that?

A: The under recovery compensation has to be on quarterly basis. The losses, which we have shown in the Q1, are abnormally high, Rs 22,451 crore. So, we have suggested the Government of India that the compensation should be on quarterly basis.

Q: What is your loss on petrol right now per litre?

A: On petrol, under recovery is Rs 3.84 paise from August 16 onwards.

Q: Is there a plan to raise petrol prices because that’s deregulated? Are you going to do it this week?

A: It is deregulated. But we have some constraint, we are not able to increase the prices of motor spirit (MS). Only for that purpose we have taken up with Government of India to make it a controlled product. In our quarterly press conference, it has been suggested by the Chairman that MS should be made a controlled product so that oil companies should not have any under recoveries on this product.

Q: So, you are saying that right now you would like to raise petrol prices by about Rs 4 a litre, but you are not allowed to, right?

A: I cannot say that it's not allowed. But the atmosphere is not in that direction.

Q: Has the government got back on your request to either make it a regulated item or to let you raise prices?

A: Till date, we have not heard anything from the Government of India.

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Q: So, if this continues like this then what kind of under recoveries are you looking at for the current quarter, July-August-September?

A: MS under recovery is not so substantial as compared to the diesel, SQ and LPG. If you see these three products, industry is having under recovery of Rs 398 crore per day. We have an unmet under recovery of more than Rs 32,000 crore up to Q1. For the two months period, July-August, OMCs are already having under recovery of more than Rs 24,000 crore.

If same trend continue then total under recovery for the industry will be round about Rs 180,000 crore for the year as a whole. It may go up because the international prices for oil and petroleum products are increasing. So, it may go up. But as per today's prices, the total under recovery for the industry for the full year will be around Rs 180,000 crore. How the government will be compensating this huge amount of Rs 180,000 crore to the oil companies? That is the bigger issue.

Q: You have asked for quarterly cash compensation or re-compensation to the oil companies. You would not be happy at an annual kind of compensation or through any other means like oil bonds, right?

A: We do not want oil bonds because we are saying that cash compensation should be given. Till date, we have not received cash compensation for January to March quarter. Two installments are still pending.

We are going to get last installment only on August 28, for January to March period. Due to that, our borrowings have already reached Rs 90,000 crore. So, we have requested Government of India that a procedure should be made in such a way that it should be compensated on monthly basis, on cash basis.

Q: Your debt at Rs 90,000 crore, over USD 16 billion. How do you propose to operate like this?

A: This has been taken. The seriousness of the issue has been appraised to the government. If you see three OMCs, the total loss for the first quarter itself is more that Rs 40,000 crore.

Q: It is not helping that your refining margins are also weakening. This quarter was a very poor picture on refining margins as well.

A: Refinery margin, major reason is one time inventory losses. It is equivalent to USD 7.54. If you take out those inventory losses, the margins are around USD 3. Prices are increasing since June onwards. So, the losses in the first quarter will be compensated in the second quarter by way of inventory gains. Rupee is stable, since June, between 55-55.50. So, we don’t think there will be exchange losses in that regard.

Q: Even USD 2.8 a barrel, stripped off the inventory losses, is not great going. You had USD 4.3 in the previous quarter.

A: If you see the crack for the first quarter, it was between USD 8-9. Crack means the difference between the crude and product prices. Now that product prices crack has also improved from USD 8 to USD 16-17. So, margins are improving.

From July onwards, we have very healthy margin because crack has improved from USD 16 to USD 17. So, we hope that if the same trend continues, the refinery margin is going to improve.

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Q: I'll ask you again about the price revision because the OMC fortnightly revision is due today, tomorrow. You are saying that there is little possibility that you will be able to raise any product prices either tomorrow or day after.

A: No, I can't comment. We can increase only the MS prices, not other prices of three controlled products.

Q: I was talking only about petrol prices, is there a chance that it may be raised tomorrow or day after at your fortnightly revision?

A: I can't comment on that. It is a sensitive issue.

Q: Has there been any communication on the possibility going forward or a review that’s going-on on diesel and LPG in recent weeks?

A: Government of India has to take a decision, I can't comment on that. But we have taken up the matter with the Ministry of Petroleum that there is a need to either revise the prices or to compensate fully to the OMCs.

Q: So, if things continue this way, without any compensation, chances are that you will report another Rs 20,000 crore plus loss in the current quarter.

A: No, I can't comment. But we are hopeful that we will receive compensation in this monsoon session, they may put up some supplementary budget. We are hopeful that by the next quarter we should be getting the compensation.