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The menace of petroleum under-recoveries

With the Finance Minister not giving an approval to the Petroleum Ministry’s plan to split petroleum under-recoveries to the extent of 50%, upstream and downstream oil industry participants may become the major losers, unless the government plans to deepen its deficit.

Price of benchmark crude oil (the Brent variety of crude oil) in the global market is on a rise. There are generally two reasons due to which the price of any commodity goes up. One, increase in demand and two, lower supply.

Given today’s scenario, demand for crude oil rise is expected to increase substantially compared to the previous year. Following are the reasons:

  • US is the largest consumer of crude oil in the world. According to estimates, GDP of the US is estimated to grow by 3.5% in the fourth quarter (December 2010 quarter) compared to 2.6% in the year-ago period.
  • Industrial orders in the Euro area are expected to have risen by 1.9% in November.
  • There has been a sharp improvement in the business climate index in the Euro zone (as per Bloomberg survey).
  • Winter demand has been higher on account of severe winters in 2010.

 Supply is not expected to increase at the same pace because of the following reasons:

  • Decline in inventories in the Europe
  • Decrease in supply from the OPEC
  • Maintenance of refineries are due during the March and June quarters leading to lower refinery products

India imports nearly 70% of its crude requirement. Hence, rise in prices of crude oil directly affects the exchequer. It also adversely affects the oil companies as the government has capped prices of essential petroleum products like diesel, LPG (for domestic use) and kerosene (under public distribution system). This results in under-recoveries of the oil companies.

 For the current financial year, under-recoveries are estimated at Rs 72,000 crore. Of this, downstream oil companies like IndianOil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are expected to bear Rs 12,000. Upstream oil companies are expected to shell out Rs 24,000 crore on sale of crude to refineries.

Categories: Crude Oil & Petroleum
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