Private oilcos may have to shell out windfall tax

[SUKU OPTIMISTIC]

NEW DELHI: Private oilcos like Reliance Industries (RIL), Essar and
Cairn may have to forgo some of their profits to share the huge
subsidy burden in the oil sector. A proposal on these lines, which was
first mooted by the Left parties, is now being considered “seriously”
by the ruling party leadership, following a similar demand by the
Congress’ latest political ally, the Samajwadi Party.

A windfall tax is normally levied on oil exploration and production
companies who reap huge profits when global crude prices increase.
Refinery companies, on the other hand, face pressure on their margins
as costs go up. Sources in the know confirmed that the SP leadership,
which has openly criticised the petroleum ministry’s stand on fuel
prices, has demanded that private oil companies whose profits have
surged thanks to high oil prices, need to share the subsidy burden.

A decision to this effect is expected towards the end of this month.
The changing political landscape may revive the government’s proposal
to widen the oil subsidy sharing mechanism, currently confined to PSU
oil companies and the exchequer. It is understood from official
sources that the proposal, mooted earlier from within the government,
was summarily turned down by petroleum minister Murli Deora before.

According to official sources, it was proposed that the Reliance
refinery should be asked to offer discount for at least two products,
cooking gas (LPG) and kerosene, meant for the public distribution.
While announcing the marginal fuel price hike on June 4, Mr Deora,
however, said that he was against any such move to involve private
companies, including Reliance, in sharing the oil price burden.

On June 4, at the prevailing crude prices ($129/barrel), the under-
recoveries of oil marketing companies (OMCs) on the sale of petrol,
diesel, PDS kerosene and domestic LPG was estimated at around Rs
2,45,305 crore for 2008-09.

Sources close to the current political developments said that SP has
demanded that private companies like RIL are minting money due to
rising global oil prices and they can’t be protected at the cost of
common man and public sector companies. “The demand is in the public
interest,” a source close to the SP leadership said. Many members of
the Parliament (MPs) have been demanding that private refiners as well
as exploration & production (E&P) companies like Cairn, Niko and GSPC
should also contribute towards sharing of OMCs’ under-recoveries.

While E&P companies could offer discounted crude like ONGC (which
would reduce costs for refineries and thus the loss on the selling
price), refineries could sell the products at subsidised prices to
public sector oilcos. As of now, public sector oil companies buy a
marginal quantity of subsidised fuels like cooking gas and kerosene
from the private refineries at import parity prices.

Currently, the under-recoveries are split by public sector E&P
companies like ONGC, OIL and Gail through discounts, public sector
OMCs like IOC, BPCL and HPCL through direct subsidised retail, and the
government through oil bonds. On June 4, the government increased
prices of three sensitive fuel products marginally — petrol by Rs 5/
litre, diesel by Rs 3/litre and cooking gas by Rs 50 per cylinder.

The government didn’t increase the price of kerosene, a politically
sensitive product considered to be used by the poor. Even as there has
been a marginal price increase, public sector OMCs are losing Rs 14.92/
litre on petrol, Rs 24.90/ litre on diesel, Rs 38/litre on kerosene
and Rs 338.53 on every LPG cylinder.

IOC, which has over 50% market share in fuel retailers among PSUs, is
losing Rs 383 crore per day on fuel sales. The losses are expected to
go up significantly as the crude oil prices, currently hovering at
around $145/barrel, are likely to touch $150/barrel mark soon.


N.Sukumar
Research Analyst
www.kences1.blogspot.com