With more than 30% decline in international crude oil prices in Q3 FY15 (till mid-December 2014) the downstream oil refining industry is likely to witness larger inventory losses in Q3FY15 which would suppress the GRMs, says ICRA in its quarterly research update.
The inventory valuation losses would be accentuated for inland refineries which are saddled with large crude inventory of several million barrels in pipelines. However some support to the GRMs would be available from the higher crack spreads witnessed during the quarter for several products.
According to K. Ravichandran, senior vice-president and co-head, Corporate Ratings, ICRA, ''International crude oil prices have continued to trend downwards from the end of Q2 FY15 with the Brent crude oil price declining by more than 30% till date in Q3 FY15. If the prices remain soft until the end of Q3 FY15, it would lead to large inventory valuation losses for downstream companies. Consequently GRMs are expected to be negative or remain subdued in Q3 FY15 on account of large inventory valuation losses, though partly offset by higher crack spreads witnessed during the quarter for several products.''
Significantly the GoI decided to deregulate the diesel prices in the middle of October 2014. The decision to deregulate diesel prices has come at a time when the global crude oil prices have been falling significantly and the same has given the opportunity to the OMCs to reduce the retail prices of auto-fuels. However the GoI hiked the excise duty on diesel and petrol two times in quick succession to boost its revenues by Rs. 100 billion for the rest of FY15 and around Rs. 270 billion for FY16.
According to K. Ravichandran, ''ICRA Research notes that the retail prices of diesel continued to decline post deregulation due to material fall in global prices of crude oil and petroleum products; however, the diesel price deregulation, a key reform in Indian Oil & Gas sector, will be tested at the time of sharp increase in crude oil prices.''
With the implementation of the modified Direct Benefit Transfer Scheme (MDBTL), the OMCs would be allowed to sell domestic LPG at market price while the subsidy will be directly transferred to the accounts of customers. There is however lack of clarity on the sharing of the LPG subsidies to be borne under MDBTL as the GoI is likely to fix subsidy (in Rs/cylinder) for itself and upstream companies in the beginning of the year, while the OMCs may be exposed to small under recoveries in the interim period depending upon international LPG prices and forex rate which eventually may be shared by the GoI. Nevertheless, the issues related to delay in release of cash compensation to the OMCs by the GoI would materially reduce for LPG subsidies, which would be around 2/3rd of total subsidies from FY16 onwards. If MDBTL is successfully implemented, the OMCs could witness material fall in working capital intensity, thereby leading to reduction in short-term debt levels and improvement in liquidity position.
Further, direct transfer of subsidy to bank accounts may also help the GoI to reduce leakage of LPG (domestic) of around Rs. 100 billion as per the reported estimates of MoPNG, GoI.
The GoI is reported to be planning to provide subsidised kerosene only to un-electrified households, which could lead to material reduction in kerosene consumption and reduce subsidies. Besides, even un-electrified households using kerosene for lighting purpose may be provided cash subsidy by the GoI and would be encouraged to switch to lamps run by solar or bio-mass. The aforementioned steps, if implemented successfully may also reduce the diversion of kerosene for diesel adulteration, which could reduce the leakage related to kerosene subsides.
