Oil companies reeling under debt as borrowings cross Rs1-lakh cr.

MUMBAI: If you thought petrol and diesel were going to get cheaper thanks to falling crude prices, think again. In fact, thank your lucky stars if there is no shortage in the next 2-3 months.

The three companies supplying these fuels — IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation — are up to their necks in debt and are not even sure if daily operations will continue beyond November.

This means their refineries could gradually shut down across the country and petrol pumps will have no stocks of diesel or petrol. Households will have to wait for eternity when it comes to their reliable LPG cylinder. Remember, it was not so long ago when there were reports of diesel shortage while fresh cylinder connections had also stopped.
Why is this happening now when prices of petrol and diesel were recently hiked and things seemed better on the global crude price front?

Well, for a start, the hike was not enough. Two, and more importantly, the government has still not compensated the three oil companies for losses incurred on sale of petrol, diesel, cooking gas and kerosene since January this year. This is generally done in the form of oil bonds and the aggregate amount for the nine months ending this September is a staggering Rs65,000 crore.

The combined borrowings of IOC, HPCL and BPCL have already exceeded Rs1lakh crore (it is nearly Rs110,000 crore) and they will have to stop sometime. One good reason is that between them, their borrowing limit is Rs140,000 crore, which translates into one more month of pleading and negotiating with banks for money.

The bad news is that banks themselves are in the midst of a liquidity crunch which they insist is ‘only temporary’. The fact remains though that they borrowed nearly Rs75,000 crore from RBI during the last ten days. Indications are that they are not going to be in a particularly generous mood to lend especially with the recent financial collapse in the US.

The oil companies have also been borrowing from overseas institutions but fear this route may also dry up once losses begin to accumulate and lenders turn wary.
The good news is that a portion of the oil bonds are expected to be issued within a month but this will be a temporary reprieve. Oil industry officials say that financial institutions will, at best, pick up Rs5,000 crore worth of bonds per month which only means that borrowings will continue.

Consequently, the debt, equity ratios of the three oil companies could touch dangerous levels which will again give banks a good reason not to lend. Sources say the worst case scenario could see HPCL and BPCL shutting down operations first with IOC following suit rapidly.

“Both HPCL and BPCL are dominant in the western region and if they close down their refineries, there is no way IOC can even handle product distribution for a single day,” they say.

What especially hurts is that crude prices have fallen to $105 per barrel from the dangerous levels of $145 two months ago. Despite this, the oil companies are still losing Rs300 per cylinder and Rs30 per litre on kerosene. In contrast, losses on petrol and diesel are a lot lower at Rs5 and Rs12 per litre apiece. Diesel, however, continues to be an area of concern because consumption has been growing at nearly 20% annually against the companies’ projected 12%. This is because it is increasingly being used in generators thanks to the severe power crisis in the southern states and Maharashtra.

Sources say that the only way out is for the oil majors to decide diesel and petrol prices on the lines of aviation turbine fuel. “Losses on cooking gas and kerosene should be transferred to the Union Budget,” they add.

Finally, it boils down to paying more for fuel or learning to live without it. The ball is now in the government’s court.