OMCs may pare losses on govt's subsidy promise

State-run oil marketing companies will be able to taper their third quarter losses after the government has committed itself to a Rs 12,000-crore (Rs 120-billion) cash subsidy to compensate them for selling cooking fuels at government-regulated prices.

The cash subsidy is a deviation from the earlier practice of issuing bonds for compensation. However, this is against the estimated underrecovery of about Rs 30,000 crore (Rs 300 billion) on cooking fuels made by the ministry of petroleum and natural gas for the current financial year.

"We have received a letter from the finance ministry, assuring a disbursement of Rs 12,000 crore (Rs 120 billion) in cash towards the underrecoveries of OMCs on sale of LPG and kerosene. This will help the OMCs to announce better results for the previous quarter," petroleum secretary R S Pandey said on Tuesday.

Indian Oil Corporation, the largest oil marketer in the country, will get Rs 7,000 crore (Rs 70 billion) and the remainder will be shared between other two OMCs -- Hindustan Petroleum Corporation and Bharat Petroleum Corporation Limited. The ministry would seek more funds to subsidise sales for the full year, Pandey said.

OMCs show the subsidy as a positive on their balance sheet on the basis of a government letter even if the actual release of funds happen later.

The government, on its part, will have to take an approval from Parliament for releasing the Rs 12,000-crore (Rs 120-billion) subsidy. This will also push the government spending by a similar amount unless it is able to show a saving in the expenditure.

While welcoming the move to shift from bonds to cash, the OMCs said the cash disbursed was not enough to cover the losses.

"Cash compensation is a welcome move since liquidating bonds take a long time. However, the quantum of compensation granted is not enough. We are likely to end 2009-10 with underrecoveries of Rs 19,500 crore (Rs 195 billion) from the sale of LPG and kerosene, while only Rs 7,000 crore (Rs 70 billion) is being compensated as of now. We only hope that we would be compensated further," said S V Narasimhan, director (finance) at IOC.

The underrecoveries incurred by OMCs on cooking fuels have affected their financial performance. For the second quarter of 2009-10, Indian Oil reported a meagre profit of Rs 284 crore (Rs 2.84 billion). However, both BPCL and HPCL reported losses of Rs 159 crore (Rs 1.59 billion) and Rs 137 crore (Rs 1.37 billion), respectively.

For the current year, the underrecoveries on auto fuels are being fully compensated in the form of discounts from upstream companies like ONGC, OIL and Gail India, while those on sales of kerosene and LPG is supposed to be compensated by the government.