Taking a hit on its profitability due to ad-hoc Government policy, IndianOil has sought immediate remedies for the existing flaws in cooking and auto fuel retail pricing. In conversation with Business Line, Mr R.S. Butola, Chairman, IOC, says that the company does not have more resilience to withstand high crude and product prices.
At current crude and product price levels what is the impact on the retail front that IOC can take?Last fiscal IOC's revenue loss was Rs 43,000 crore and industry's was Rs 78,000 crore. (The oil companies suffer revenue loss for selling petroleum products below the market price.) Of this Rs 78,000 crore, 52.5 per cent of the subsidy burden was borne by the Government, 38.7 per cent upstream companies, and marketing company companies had bear 8.8 per cent. This is excluding the loss incurred on selling petrol below the market price. If you include petrol then the marketing companies, including IOC, have taken a hit of 11.2 per cent on the total under recovery.
So, will FY12 be on similar lines?Last year the crude price average was $84 a barrel, this year it is already $114 a barrel and at this rate the under recoveries will be Rs 1,70,000 crore out of which IndianOil's share will be about Rs 94,000 crore. The company has no resilience to bear this.
Basically you have a monster (under recoveries) looming at you?It is difficult situation for us. We have requested the Government that whatever are the under recoveries, marketing companies should be provided full (100 per cent) reimbursement. Further, there should be a certain mechanism that reduces uncertainties and reduces our borrowings.
Also there should be no time lag in reimbursement as lag leads to increase in interest costs. This year the interest rates have also gone up. Therefore, whatever cash support is to be given should be done on a month-to-month basis.
What is your current borrowing?Today our borrowings stand at Rs 68,482 crore and our under recovery is at Rs 256 crore a day. On a monthly basis our under recoveries stand at Rs 7,500-8,000 crore, so we need to borrow Rs 5,000-6,000 crore on a monthly basis. We must remember that liquidity in the system is not infinite. Therefore, companies will not have resilience to take these kinds of under-recoveries caused by high prices. The Government has to take a decision, and they are fully aware of the serious situation.
Is it true that China also has a controlled price regime?They had a subsidy mechanism but over a period of time they have established a formula. So there is a certainty in the system based on which the refineries and oil companies can plan their strategies. We should also have a formula so that there is certainty. Given the high crude and product prices and the current selling prices, the gap will be much larger than the previous year. Something has to be done – either crude price should come down, or the Government should find a solution.
Do you have the freedom to raise petrol prices or is there an informal Government control?I will not say there is an informal control. We can increase the prices. We did go for a hike of Rs 5, but still did not pass the full burden to the consumer. We take all aspects into consideration. The gap of Rs 5.50 last month is now reduced to Rs 1.35 a litre.
Though we are free to pass on the prices, we cannot be mechanical. We have to keep the interest of consumers in mind. However, if the prices don't really narrow down then we will have to go for another increase.
How much of a gap between the market price and your price are you comfortable with? And will there be a price hike this fortnight?We cannot take any losses. But, as I was saying we have to make projections. We will have to see how prices behave. Though we keep reviewing on daily basis but a decision will be taken when we see the international prices continuing to stay in the high trajectory.
Is IOC planning to set up another refinery?Yes, we are exploring the prospects of a new coastal refinery. The new refinery will be most likely on the West coast, but we have not zeroed in on the location. It is at a conceptual stage. At our internal Executive Board Meet to review our strategy, it was felt that the current refining capacity in the country is 188 mt (million tonne) and the capacity will go up to about 238 mt by 2012. Agreed there will be a period when there will be surplus capacity. But, India is growing and post 2017-18 the demand will start outgrowing the capacities. This is another 7-8 years. Thus, it is time to start planning another refinery.
Why are you thinking of a coastal location?We are talking about coastal refinery as it gives additional flexibility to source crude oil from cheaper sources. Besides, a much larger diversified crude basket can be used. Also if we need to export products it is easier. Our internal team is working on it. (Currently, IOC has 8 refineries and two CPCL refineries under its umbrella.)
What is your strategy for upstream business?It is becoming imperative for us to have upstream portfolio. We are also aware of the capabilities required to acquire a strong position in the exploration and production segment. For this we need to build expertise within the company. An assessment is being done on how we will go about it, whether we will float a special purpose vehicle or set up separate division within the company. In another two-three months we would have firmed up a view on this.
