Budgetary Support And Upstream Discounts Saves The Day For Domestic Oil Refiners

After spending a major part of fiscal 2011-12 ruing over their astronomical under-recoveries as a result of selling subsidised fuel like diesel, kerosene and LPG much below the international market rates, the three domestic oil marketing companies (OMCs) – IOCL, BPCL and HPCL - have managed to close their FY12 books in the black, thanks to some much-needed higher share of budgetary support and upstream discounts.

Based on the financial information available for these OMCs with the BSE, the total under-recovery for FY12 stood at around Rs 1,38,500 crore. Of this, roughly Rs 83,500 crore was given as budgetary support, while the remaining Rs 55,000 crore was chipped in by the upstream oil and gas exploration companies like ONGC, Oil India and GAIL in a pre-determined proportionate manner. Thus the entire portion of the subsidy burden for FY12 was borne by the government and upstream majors, helping the ailing oil refiners to breathe a sigh of relief. 

Investors must note that the quarterly results for the OMCs have become less relevant as their financial performance is mostly based on budgetary support by the government and the upstream sharing of subsidy burden. Though the quarterly results may have wide swings based on interim budgetary support by the government, they are expected to remain profitable at the end of the year.

While the OMCs have some much-needed reasons to rejoice, the situation for the upstream majors is quite a mixed bag. With GAIL yet to declare its March quarter results, the financial performance of ONGC and Oil India have sent out mixed reactions.

ONGC, despite seeing a whopping 80 per cent rise in its subsidy share for FY12, saw its net profits for the March ended quarter of fiscal 2012 double as a result of sharp rupee depreciation and a rise in the international prices of crude oil. Higher crude oil prices coupled with the sharp weakening of the Indian rupee helped the upstream major yield a better price for its crude products in rupee terms. Moreover, the alteration in the allocation of upstream subsidy burden also helped ONGC as the company was directed to pay 80.8 per cent of the upstream share as against the 82 per cent it was asked to pay between the period April-December 2011.

However, this decrease was largely compensated by a higher burden on Oil India as it was asked to foot 13.4 per cent of the under-recoveries as compared to 12 per cent in the April-December period of 2011. The company also felt pressured by its low production volumes for crude oil and natural gas. In fact Oil India saw its subsidy share for FY12 rise by an enormous 123 per cent.As for the government, it was good to see that rare spectacle where it stepped up its actions and pooled in a larger share of the burden.

However, given the tight fiscal situation, market sources have revealed that the government has already exhausted a major portion of its FY13 subsidy war chest of Rs 43,580 crore and hence the outlook for the FY13 subsidy regime remains uncertain. With the rupee continuing to remain weak at above the 56 per dollar levels and no positive outcome yet on the de-regulation of subsidised fuels like diesel, kerosene and LPG, the overall situation going forward continues to remain ad-hoc and uncertain.