Markets cheer fuel deregulation

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It has been a case of third time lucky for public sector oil companies. The Kirit Parikh committee recommendations to deregulate the petroleum sector have been accepted — partially at least. While markets cheered the news wholeheartedly, it may be time for just two and a half cheers instead of the usual three, till there is more clarity on details.

On Friday, stock prices of the oil marketing firms — Bharat Petroleum, Hindustan Petroleum and Indian Oil — were up 10-14 per cent on the price rise and the government’s intent to deregulate. However, the celebration could be somewhat premature. “Even now 60 per cent of the products we sell will be below cost,” says an official working with an oil marketing firm. These firms will still be incurring losses on sales of fuel. The government will still have to pay out cash subsidies to these companies to keep them financially viable. “The big positive is that the government has decided, in-principle, to free diesel prices,” says the CFO of one of the oil PSUs. “Diesel accounts for 40 per cent of our sales, and if we are not losing money here, the overall losses will be manageable,” he adds.
ONGC and Oil India – which produce crude oil and natural gas — saw their share prices shoot up 4-6 per cent. These two companies had been shouldering a part of the losses incurred by the oil marketing firms. Lower losses on that front means a lower subsidy payout. During FY10, ONGC and OIL paid out Rs 11,554 crore and Rs 1,155 crore respectively as subsidies.
Lower losses downstream means a lower outgo for these firms. “We are happy with the move,” says Mr Anant Kumar, director Oil India. “But we are still awaiting clarity on the subsidy sharing scheme for this year,” he added.