Oil refiners to be hit by new policy

NEW DELHI: The introduction of the trade parity pricing regime in the petro sector will evoke a mixed bag reaction from the oil bigwigs.

While, refinery companies, particularly those with limited marketing networks like MRPL and Reliance will take the hardest knock on their bottomlines, integrated oilcos like IOC, HPCL, BPCL are expected to be better off.

The oil bond package is expected to bail out the oilcos but it may have been a little too late. Q1 results may have a few surprises in store. While IOC is expected to sail through and post profits, thanks largely to the capital recovered from sale of ONGC shares, BPCL and HPCL may not be able to scrape through.

Industry sources said that with the oil companies taking in huge losses for two months of this quarter, it may be difficult to wipe out all the losses. Moreover, the price hike is linked to an average crude price of $ 70 a barrel. Any upward increase in prices will only put pressure on retail prices.

The reduction of customs duty on petro products like petrol and diesel to 7.5% from 10%, while maintaining a 5% duty on crude has reduced the effective rate of protection on refineries.

However, this will reduce the refinery gate prices, which, in turn, will reduce the losses for the marketing companies as they will buy the products at a lower price from refiners.

The new trade parity policy is aimed at reducing some part of the notional costs added on in the import parity pricing regime. In the import parity pricing regime domestic oilcos added notional costs, i.e., added costs like freight, insurance, customs duty etc, to the product price, to the retail price.

But, under trade parity, the prices will take into account the export parity price, i.e., the price at which the fuel is exported. For instance, prices of petrol would need to be increased by Rs 10 per litre under the old import parity pricing formula if it were to be brought at par with international levels.

However, petrol would need to be increased by Rs 8.75 under trade parity. The new pricing package also tries to make in more transparency in the system by making provisions for oil bonds which is like a budgetary allocation for meeting the subsidy bill.

This, however, may not augur well with the government’s commitments on FRBM as it has been making efforts to cut back subsidies.