The government decision to let state-owned oil marketing companies (OMCs) absorb Rs 1 per litre increase in retail price of petrol and diesel is unlikely make a major dent in their revenues as almost all entities are constantly making major gains from a rise in their gross refining margins or GRMs. GRM is a key measure of profitability for refining firms and is derived by deducting the cost of crude oil they buy from the total market value of the refined products they produce.
The hardening of crude prices and favourable demand-supply equation in the global market have shot up GRMs of all oil marketing firms leaving them with higher profits even though the skyrocketing retail price of petrol and diesel continues to throw household budgets haywire. According to oil ministry’s Petroleum Planning and Analysis Cell (PPAC), the GRM of the country’s largest oil marketing company Indian Oil Corporation (IOC) has increased three-four times from its largest refineries in the last three years. This has also increased its net profit in the same margin.
India has around 235 million metric tons per annum (MMTPA) of refining capacity, making it the second-largest refiner in Asia. The surplus capacity results in exports of products largely by private sector refineries. The weighted average GRM of nine IOC refineries stood at $ 5.06 a barrel in FY16 but it has more than doubled to $10.21 at the end of April-June quarter of FY19. Similarly, weighted average of two refineries of BPCL has increased from $6.59 in FY16 to $7.49 in Q1 of FY19.
The GRM of two Hindustan Petroleum Corporation (HPCL) refineries has also increased from $ 6.68 a barrel to $ 7.15 a barrel in the same period. Though the GRMs of state-owned entities have risen, it is still lower than Reliance Industries that has seem its margins rise to $11.60 a barrel in FY18. Similarly, Nayara Energy (formerly Essar Oil) has also seen its GRM oscillating in the range of $9–11 a barrel. The higher GRM has come with higher profitability for companies. IOC has increased its profit to Rs 213.4612 billion in FY 18 increasing from Rs 191.0640 billion in FY17 and Rs 98.7798 billion in FY16.
“Its not just the market dynamics that is dictating higher GRMs for OMCs. Freedom to price auto fuel and reduction in subsidy sharing burden has increased OMCs’ investible capital that has been used to upgrade technology and hence there is an improvement in GRMs. This should not been seen as OMCs making abnormal profits and hence having capacity to bear more burden of faulty government policies,” said an industry expert asking not to be named.
Earlier this month, the Centre decided to reduce the retail price of petrol and diesel by Rs 2.50 per litre through excise duty cut of Rs 1.50 per litre and getting OMCs to absorb another Rs 1 hike in auto fuel prices. It also asked state to reduce duty to the tune of a similar Rs 2.50 per litre on both the products. Sources said the OMCs are now fearing that their higher GRM s may be capped so that government is able to reduce the retail price of sensitive fuels such as petrol and diesel even though global oil prices are expected to rise further after November 4, when US energy sector sanctions on Iran takes effect.
It’s not that OMCs are the only gainers when global oil prices are higher. The centre has also more than doubled its excise revenue to over Rs 2240 billion in FY 18 from just about Rs 990 billion in FY 15 through nine increases in duty between November 2014 and January 2016. But with expectation of higher expenditure on populist schemes ahead of general elections in 2019, the Centre is not willing to cut excise duty further. This could bring pressure on OMCs who could see their margins erode faster than expected in coming quarters