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Export-parity pricing disastrous for refiners

Wednesday, 22 May 2013 - 9:42am IST | Place: Mumbai | Agency: dna

It could wipe off their gross refining margins; HPCL may suffer the most.

The three crude oil refining and marketing companies might see their gross refining margins (GRMs), which determine their profitability, getting completely wiped off if export-parity pricing (EPP) is implemented for calculating subsidy.

GRM is the difference between the cost of a barrel of crude oil and the selling price of refined products like petrol and diesel. Refiners’ margin is their profit calculated in terms of dollars per barrel.

Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL), the top three government-backed oil marketing companies (OMCs) with a total refining capacity of 110 million metric tonne per annum, report an average GRM of close to $5-6 per barrel every year.

They sell fuels at controlled prices. Hence, their profitability numbers are usually notional unless the OMCs are compensated by the government via subsidy.

This subsidy is calculated in terms of trade parity pricing which involves 80% of import parity price and 20% of export parity price.

However, with the finance ministry now insistent to move to an EPP model, sector experts and company officials say the new regime will reduce their subsidy payout by as much as $5 per barrel. Essentially, their annual average GRMs could shrink to zero.

“There are chances that the EPP model will take away the entire benefits of import duties that these companies get. Their losses on selling diesel at controlled prices will increase further,” said Gagan Dixit, analyst with brokerage Quant.

Dixit said the new model is completely unfair as the price of crude oil imported by refiners, is not calculated in terms of EPP.

“It is not only about GRMs, it is about humongous losses that we will make. It will make all refinery projects unviable for HPCL,” said Bhaswar Mukherjee, director-finance, HPCL.

He declined further details on the feared impact, but analysts say HPCL’s GRM will be the worst hit due to the OMC’s low scale and relatively fewer diversifications.

“Even with trade-parity pricing, HPCL could struggle to break even on 100% pay. The export-parity pricing math will likely create a large funding gap, which HPCL can’t absorb,” said Sanjay Mookim and Badrinath Srinivasan from brokerage Credit Suisse in a report.

They said the accumulated under-funding of HPCL for the first nine months of last fiscal stood around Rs 5,500 crore.

“Assuming it were paid 100% for the full year (on trade-parity, and it paid no taxes), Q4 core operating profit (Ebitda) would have to be Rs 1,360 crore higher than Q3 for HPCL to have close to zero FY13 PAT. This translates into a $ 6.7/barrel increase in GRM, which is unlikely,” they wrote.

While EPP could wipe out GRMs, OMCs are still not sure whether it will be based on the 100% EPP model or the 50% EPP model, said another analyst with an international brokerage.

Under the EPP regime, refiners would stand to lose the benefit of import duties which otherwise gets added to the cost of fuel at their refinery gates, before being sold to marketers at their petrol pumps. This would reduce the price of fuel which the government uses to calculate subsidy.

According to Mookim and Srinivasan, any shift to EPP could save the finance ministry up to Rs 18,000 crore on subsidy. But all of it would be used to fill government coffers to reduce its massive trade deficit.

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