Subsidies driving top oil companies bankrupt

21 May 2008

Mumbai: Flush with cash till 2006, government owned oil marketing companies, who have been subsidising retail fuel prices despite the escalating global oil prices may well be on the verge of bankruptcy in a few weeks unless the government moves in to reverse the drain being imposed on them in a pre-election year.

Supply issues have started to surface with respect to the supply of subsidised kerosene in the public distribution system (PDS). While the open market price of kerosene hovers around Rs30 per litre, the PDS prices are subsidised at under Rs10 a litre. Kerosene forms a major cooking fuel for the poorer Indian population, who cannot afford the subsidised LPG connections distributed by the oil marketing companies, and cannt depend on firewood to cook food.

Now, the oil marketing companies would also like to see a cap on their loss making set up of LPG, or cooking gas distribution, which again is subsidised. With global shortages starting to be reported for diesel, a storm can be seen brewing at the horizon, with india having marked a 25 per cent increase in diesel consumption.

Private sector oil marketing companies have started to shut down, or roll back operations. Last week private fuel retailer Reliance Industries was forced to shut all its 1,432 petrol pumps as it could not afford to keep supplying auto fuels at subsidised rates, unlike its government-owned competitors, who are quietly heading in to the red (See: Reliance closes all its 1,432 petrol pumps; PSU oil companies' losses mount to Rs77,303 crore) 

Petrol and diesel retail sales are not covered by the subsidy offered to government-owned oil marketing companies, making it Rs10 to Rs20 more expensive than what retails at IndianOil, Bharat Petroleum, and Hindustan Petroleum outlets.

Now, with crude oil prices hitting the super spike levels of $128 plus, India would need to brace for a fuel shortage as oil marketing companies become increasingly strapped for funds and start on the final descent towards bankruptcy.

Industry sources say the oil bonds issued by the government to compensate oil marketing companies for their losses are also worthless, as they need to be sold at discount in order to raise cash to meet their working capital requirements.