Oil firms look for higher provision in Budget 2011- 12

Struggling under mounting losses and subsidy bills, the public sector oil companies want the finance minister to make a realistic provision in the Budget for subsidies on petroleum products so that the government’s share of the compensation comes through in time for preparing their financial results.

The 2010-11 Budget, presented by finance minister Pranab Mukherjee, had made a provision of a measly Rs 2,900 crore for subsides on LPG and kerosene, which is only a small fraction of what the government will actually end up paying as subsidy this year.

With international prices of crude oil skyrocketing to $ 100 per barrel, the loss in revenue for the oil companies on LPG, kerosene and diesel sales is expected to be around Rs 75,000 crore.

While one- third of this amount comes from upstream oil firms — Oil and Natural Gas Corp ( ONGC) and Oil India Ltd ( OIL) — which produce crude oil, the finance ministry provides a major chunk of the remaining under- recoveries. The oil marketing firms — Indian Oil Corp ( IOC), Bharat Petroleum Corp Ltd ( BPCL) and Hindustan Petroleum Corp Ltd ( HPCL) — and gas major GAIL India Ltd also bear part of the burden.

The share from ONGC and OIL comes through in time but the problem is that the finance ministry delays payments for the government’s share of the subsidy to the oil companies.

The payments to the oil companies have to be cleared as supplementary demands for grants by the Parliament, since they have not been provided for in the Budget, and this delays the entire process of compensation even further.

As a result the oil companies often have to show losses in their quarterly results since the compensation gets delayed. As the oil companies are listed on the stock markets this batters their brand image. “ We have to literally run around for the money till the last minute,” said IOC chairman and managing director ( CMD) S. V. Narasimhan.

In the latest round of compensation only in- principle approval for Rs. 8,000 crore came through at the time of declaration of the third quarter results. Although this has enabled the oil companies to clean up their books and show a profit, the actual cash will flow in only when the third supplementary demand for grants is approved during the forthcoming Budget session of Parliament.

The delays in the compensation also force the oil companies to go in for higher borrowings as all crude imports have to be paid for in hard cash. However, when the oil firms go in for a higher levels of borrowing, banks start charging a higher interest rate which increases the cost of operations.

Narasimhan disclosed that while IOC had paid an average interest rate of 5.4 per cent during the last financial year the cost of borrowings has gone up to 5.5 per cent this fiscal. “ We have still managed to keep the interest rate below six per cent by taking recourse to higher foreign currency loans at lower rates of interest,” he said.