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Low retail prices hit state oil firms

India's state-run oil retailing firms are making losses selling products below the cost of crude as the government has not allowed them to raise prices in step with the rally in global prices, officials said.

Indian refiners are squeezed by low prices and falling sales, while Asian refining margins have surged as demand has risen at a time when most plants are in the midst of planned maintenance.

"Our margins are under severe pressure. We are selling diesel at prices more than 10 per cent lower than our cost," a senior official of a state-run oil company told Reuters on Wednesday.

"We buy products from standalone refineries at import parity prices but we have to sell them at lower prices."

State-run retailers -- Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd -- were selling their own products as well as those bought from oil firms that do not have a retail network, he said.

Diesel accounts for about 40 per cent of oil products sold in India, which has a refining capacity of 2.3 million barrels a day.

India, which imports two-thirds of its crude needs, mostly from the Middle East, reduced retail petrol and diesel prices in January when Dubai crude prices dipped below $18 per barrel.

Earlier, its retail prices were fixed to match crude prices of about $22 per barrel.

Retail prices were slashed again on March 1 as the price of crude oil imported by India was hovering around $20 a barrel.

But in March, Indian refiners saw crude prices rise about $5 a barrel, upsetting their finances.

"Crude bought at March prices is being processed now. Our retail prices are linked to a crude price of $20 a barrel, and we are under a lot of pressure," an industry official said.

He said unless the government cut excise duty or allowed refiners to raise prices, margins would continue to be negative as crude prices prevailing in April pinched the oil firms.

MINIMUM RETURN SCRAPPED

Before April 1, when the oil sector was tightly controlled by the government, oil firms were assured a 12 per cent return on capital and a complex accounting system called the Oil Pool Account insulated them from global price fluctuations.

In the past the government has issued bonds to oil firms to compensate them for selling products at low prices.

"Earlier we at least got the bonds that converted receivables into assets in our balance sheet but now it is a loss," the official said.

Since April 1, state oil firms are allowed to raise prices, but the decision has to be taken by their boards, which are controlled by the petroleum ministry.

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