The sharp rise in oil prices is threatening to derail not only the long-term expansion plans of government oil marketing companies, which control over 95 per cent of the market, but also their day-to-day operations.
"We will take a huge hit if oil prices reach $100 per barrel. It is a scary situation, especially as we have assumed a price of $85-86 per barrel for our projects and operations," says SV Narasimhan, finance director, Indian Oil Corporation (IOC), India's largest oil refiner and marketer of petroleum products.
Though the company, like its two smaller competitors -- Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) -- has been allotted bonds, additional relief is required.
"Without additional relief, IOC will lose up to Rs 3,000 crore every month for the rest of the year. This is seriously affecting our working capital needs. The bonds the government has agreed to give will only come by the end of this month at the earliest. Maybe we will get some relief in January when upstream oil companies pay us under the burden-sharing mechanism," said Narasimhan.
The company is losing around Rs 120 crore per day as it sells petrol, diesel, LPG and kerosene at government-controlled rates. HPCL and BPCL are together losing Rs 120 crore a day.
The squeeze has seen the company's borrowings in the current financial year rise to around Rs 26,000 crore, which is close to the Rs 27,000 crore it borrowed in the whole of the last fiscal (2006-07).
Analysts also paint a bleak picture for oil marketing companies. "In the short term, crude oil prices are expected to rise from the current levels," said Arvind Mahajan, executive director at consultancy firm KPMG.
According to him, oil prices will remain high and "are unlikely to fall below $65 per barrel for the next 3-4 years".
Another Delhi-based analyst says with winters approaching, the demand for crude oil will rise further, leading to an increase in prices. "Moreover, geo-political issues will continue to add to speculation," he adds.
An appreciating rupee and high refining margins have not been able to offset the adverse impact of high crude oil prices on government oil marketing companies, which also operate crude oil refineries.
Between April and October, the rupee had seen a 10 per cent rise, resulting in refiners saving 10 per cent on input costs. However, the price of the basket of crude oil that Indian refiners buy has increased by a whopping 29 per cent.
Though refinery margins have been strong, "the net balance is still negative for oil marketing companies. The marketing part of the business has been an issue," Mahajan says.
Crisil Research head Nagarajan Narasimhan agrees the marketing business of oil companies has been hit. He, however, says the current price situation is temporary.
"Our call is that fundamentals will remain strong and oil prices will stabilise in the mid-70s in the medium- to long-term," he says.
He says: "The spike in oil prices is recent." If the average price over the last two months is taken out, the price of the crude basket will come to $71-72 per barrel, he adds.
"The situation is not as grave as it is being made out to be. The refining margins have been good and the appreciation of the rupee has helped partly offset the affect of high oil prices," he says.