Oil firms are weeks away from bankruptcy

UPA government is destroying oil companies for narrow electoral reasons

MUMBAI: There was no diesel for a day at a gas station in north India recently. The public sector oil companies are slowing down the issue of new gas connections to households. The private sector oil companies are closing down petrol pumps and exporting petrol and diesel. Kerosene is not easily available in the public distribution system; the open market rate is around Rs30 a litre when the official rate is under Rs10.

If you think these are isolated events, think again. A fuel shortage looms ahead of the nation as the oil companies rapidly head towards bankruptcy. With international crude oil prices hovering around $129 a barrel, the country’s three oil marketing companies – IndianOil, Bharat Petroleum, and Hindustan Petroleum – are collectively looking at losses of Rs200,000 crore this year. These losses belong to the budget, but finance minister P Chidambaram doesn’t want his own copybook ruined. If these numbers were added to this year’s Union budget, Chidambaram’s fiscal deficit – the borrowings needed to finance government government expenditure – would bloat from a fictitious 2.5% of gross domestic product (GDP) to more than twice that figure.

Under the subsidy sharing formula designed by the government, the Oil & Natural Gas Corporation (ONGC), the country’s main oil producer, along with gas pipeline company Gail is supposed to share one-third of the oil marketing companies’ losses. But ONGC’s turnover for 2007-08 will be around Rs65,000 crore – one-third of the projected losses. Loss-sharing can thus wipe out ONGC as well.

In less than two months from now, some oil companies will be plain and simple broke as they exhaust their borrowing limits of Rs90,000 crore. They have already notched up borrowings of around Rs70,000 crore when their combined net worth is just over Rs54,000 crore. The only reason they are still able to borrow is because they are owned by the government, and governments are not expected to default.

By early July, they will simply have no cash to run their business and some of them will find it difficult to pay staff salaries. “It is like a time bomb ticking away. If the prices of petro-products are not increased immediately, they will just sink without a trace,” top industry sources said.

What is worse, global suppliers of crude and petro-products are not going to honour contracts unless money is paid upfront, which means the country could be looking at a frightening scenario of a fuel shortage.

Losses on the sale of diesel, petrol, liquefied petroleum gas (cooking gas) and kerosene are already Rs550 crore a day. What has been especially worrying is the alarming rise in the consumption of diesel. Sources say that diesel consumption has grown 25% since January this year. With world prices of the fuel closer to $160 per barrel, imports will soon have to be reduced.

Private sector refiners like Reliance and Essar are exporting diesel because it is not viable to sell in the local market. Reliance Petroleum has closed down all its 1,432 gas stations.

A spokesman for Essar Oil said the company continued to operate its 1,000-and-odd outlets, but at a reduced scale. According to him, both petrol and diesel are retailed at roughly Rs9 more than the public sector companies. Clearly, few people will buy fuel when the state oil companies are giving them the same stuff cheaper.

However, the public sector oil companies cannot continue to bleed indefinitely. If they are unable to buy any more diesel abroad due to a shortage of cash, user industries like power, shipping, transport (rail and road) and telecommunications could face a crunch. There could be havoc if the crisis extends to petrol, LPG and even a fuel like kerosene, which is used in the aviation sector.

To compensate oil companies for the losses, the government issues them oil bonds. But these bring in additional losses of their own. To raise money, the oil companies have to sell these bonds at a loss. It’s a no-win situation.