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Diesel losses could more than double for oil marketing firms

LiveMint logoLiveMint 15-06-2014 Promit Mukherjee

Mumbai: The loss on selling diesel below cost will double to over `5 a litre for oil marketers in India from a fortnight from now if there is no resolution to the present crisis in war-torn Iraq.

This increase could translate into an additional annual burden of `22,000-25,000 crore for Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd.

The development could hurt the entire process of freeing diesel prices, which was expected to be completely market-linked in the next six months, assuming the current increase of `0.50 per litre per month continued at a stable crude price of $108-109 per barrel.

“The current Iraq crisis will upset all subsidy calculations for the government if crude continues to rule at a higher level,” said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, a consultancy.

The Iraq crisis impacted the price of Brent crude, the most used benchmark, which rose from $109.37 per barrel on Wednesday to $112.46 per barrel on Saturday, a jump of almost 3% in three days, according to Bloomberg data.

If the situation persists, the prices will increase losses on sale of diesel for the three state-owned retailers from `2.80 per litre on 1 June to over `5 per litre in a fortnight. Every one rupee increase in diesel prices adds `10,000 crore in annual losses, according to Mishra. Therefore, an increase to `5 per litre from `2.80 per litre would mean an additional burden of `22,000-25,000 crore.

Diesel prices in India are at a premium of $12-13 per barrel to the Brent crude, according to data available with the Petroleum Planning and Analysis Cell, a statistical body under the oil ministry. At $108 per barrel of Brent crude on 1 June, diesel prices stood at $119 per barrel; after fixed costs of trade premium, grade and ocean freight, the price was at $123.48 per barrel, or `45.12 per litre. After adding marketing costs, marketing margins and inland delivery costs, the final desired price of diesel for Indian oil marketers was `48.72 per litre. At a regulated price of `45.92 a litre, they made a loss of `2.80 per litre at the beginning of June, according to the ministry’s analysis cell.

Considering the current method of calculation, at current Brent crude oil price of $112-113, the price of diesel in India is expected to touch `51.08 a litre in the next 15 days, translating into a loss of over `5 per litre under the regulated regime.

Bharat Petroleum does not really have any substantial exposure to Iraq but will be affected with the change in cracks (difference between crude and product prices) if the diesel price goes up, said B.K. Datta, the company’s director of refineries.

“We were looking forward to a complete de-regulation soon; but if crude goes up, our interest burden will again increase and it will affect our capital expenditure,” he said.

After rising to `25,000 crore in 2010-11, capital expenditure by oil marketers declined sharply to below `10,000 crore in the subsequent two years due to a significant increase in interest costs as they had to take loans to fund their working capital because of selling diesel, kerosene and cooking fuel at regulated prices in India, a June report by rating agency Crisil said.

In the year to 31 March, the three state-owned oil retailers faced a combined `140,000 crore loss on selling fuel below cost, of which 45% was due to diesel.

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