Refining and marketing

IMPACT ANALYSIS

Price cuts aggravate OMC losses

Highlights Contents

Estimated under-recovery on auto fuels for 2008-09 to Sections

worsen from Rs 7.1 per litre (pre-revision of retail
price) to Rs 7.5 per litre (post-revision of retail price)
Marketing loss on retail sales of auto and cooking
fuels for 2008-09 estimated to touch Rs 977.2 billion
Retail petrol, diesel and LPG to cost less by Rs 5 per litre,
Rs 2 per litre and Rs 25 per cylinder, respectively;
effective midnight January 28, 2009 1

Figures
Financial assistance in the form of oil bonds issued by
the government estimated to be at Rs 614.9 billion,
Realisation-cost gap Y-t-D 2008 2
while share of upstream players to be at Rs 362.3
billion (assuming no burden to be shared by OMCs) Realisation-cost gap Y-t-D 2009 2

Tables

Trends in international and domestic prices and

under-recoveries 1
Industry profitability outlook - 2008-09E 3
Government assistance 4

January 2009
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Retail petrol, diesel and LPG to cost less by Rs 5 per litre, Rs 2 per litre
and Rs 25 per cylinder, respectively; effective midnight January 28, 2009

The government has reduced the retail selling price of petrol, diesel and LPG by Rs 5 per litre, Rs 2 per litre and
Rs 25 per cylinder, respectively. The price cut came into effect from midnight January 28, 2009. Post the price
reduction, retail selling price of petrol, diesel and LPG in Mumbai is Rs 44.5 per litre, Rs 34.4 per litre and Rs
312.9 per cylinder, respectively.

Key developments

• Price cut to result in incremental under-recoveries amounting to Rs 32 billion, taking the total under-recovery
to Rs 977.2 billion
• Under-recovery on auto fuel to increase from Rs 7.1 per litre to Rs 7.5 per litre
• Under-recovery on LPG expected to increase to Rs 226.5per cylinder from Rs 222.2 per cylinder
• Bonds amounting to Rs 614.9 billion estimated to be issued for 2008-09 as against the government’s initial
estimate of Rs 946 billion

Domestic retail price adjustment not in line with international product prices
Domestic retail prices of auto and cooking fuels have traditionally been out of sync with international prices. For
Oil Marketing Companies, this results in an unfavourable mismatch between their procurement costs (which are
linked to international prices) and domestic sales realisations. The graphs below make this disparity evident, in
case of both cooking and auto fuels. Despite the fact that margins on auto fuels have turned positive for the first
time since March 2007, the price cut will result in higher under-recoveries for the year.

Table 1: Trends in domestic prices and under-recoveries

Details Unit April-Jan 08 April-Jan 09 Chg. 1
29-Jan-09
Domestic (retail) prices average
MS(Gasoline) Rs per litre 48.4 52.5 8% 44.5
HSD Rs per litre 34.9 37.8 8% 34.4
LPG Rs per cylinder 298.0 336.7 13% 312.9
SKO Rs per litre 9.1 9.1 0% 9.1
Under--recovery/ margin on retail products
MS(Gasoline) Rs per litre -3.2 -4.1 9.3
HSD Rs per litre -3.6 -11.1 4.7
LPG Rs per cylinder -212.4 -260.2 -45.3
SKO Rs per litre -14.7 -26.3 -10.1
1
Note: : The under-recoveries are average under-recoveries/margin for the month of January 2009
Source: CRISIL Research, Bloomberg

CRISIL RESEARCH REFINING AND MARKETING IMPACT ANALYSIS, JANUARY 2009 1

Comparison of TAIP (Tariff Adjusted Import Parity) Prices and Ex storage Point Prices

Figure 1: Realisation-cost gap Y-t-D 2008 Figure 2: Realisation-cost gap Y-t-D 2009
Apr-Jan 08 Apr-Jan 09
(Rs/kl) (Rs/kl)

35,000 45,000

40,000
30,000
35,000
25,000
30,000
20,000 25,000

15,000 20,000

15,000
10,000
10,000
5,000
5,000

- -
LPG (Rs/ton) SKO HSD MS LPG (Rs/ton) SKO HSD MS

TAIP Ex storage TAIP Ex storage

Under-recoveries on retail fuels estimated to go up by Rs 32 billion with the recent price cut
Considering the current price cut for 2008-09, the total estimated under-recovery on cooking and auto fuels is
expected to go up from Rs 945.3 billion to Rs 977.2 billion. The under-recovery on auto fuels is likely to worsen
from Rs 7.1 per litre (pre-price revision) to Rs 7.5 per litre (post-price revision); on LPG, it is expected to increase
to Rs 226.5 per cylinder from Rs 222.2 per cylinder.

2 CRISIL RESEARCH REFINING AND MARKETING IMPACT ANALYSIS, JANUARY 2009

Table 2: Industry profitability outlook - 2008-09E
Incorporating price Without incorporating Actuals
revision price revision
2008-09E 2008-09E 2007-08
Refining profits (Rs. Billion) 151.6 151.6 430.5
GRM ($/bbl) 4.6 4.6 10.4
Marketing profits/losses (Rs. Billion) -977.2 -945.3 -666.4

Auto fuels (Rs. Billion) -527.6 -499.0 -311.5

MS (Rs. Billion) -39.8 -28.6 -53.7
Marketing under-recovery (Rs/litre) -2.6 -1.9 -3.7
HSD (Rs. Billion) -487.8 -470.4 -257.8
Marketing under-recovery (Rs/litre) -8.7 -8.4 -4.4
Auto fuels- Under recovery (Rs/litre) -7.5 -7.1 -4.3

Cooking fuels (Rs. Billion) -449.6 -446.3 -354.9

LPG (Rs. Billion) -174.2 -170.9 -172.8
Subsidy under-recovery (Rs/cylinder) -226.5 -222.2 -228.0
SKO (Rs. Billion) -275.4 -275.4 -182.1
Subsidy under-recovery (Rs/litre) -23.5 -23.5 -15.4
Total -825.6 -793.7 -235.9
E: Estimated
Note:
1) Crude price assumed to average at $ 91.9/bbl (FOB - Indian Basket) in 2008-09
2) Does not consider export sales
3) Excludes profits earned from transfer of bulk products
Source: CRISIL Research, Bloomberg

At an average crude oil price of $91.9 per barrel (bbl) (Indian Basket), the overall operating loss for the industry is
expected to increase from Rs 235.9 billion in 2007-08 to Rs 825.6 billion in 2008-09.

Price cut to increase the burden on government

• The issuance of oil bonds of Rs 614.9 billion and upstream assistance of Rs 362.3 billion is likely to
compensate for the total under-recovery of Rs 977.2 billion. For our calculations, we have assumed that in
2008-09, the proportion of burden sharing would be similar to that seen in the first half of 2008-09. However,
in case the amount of oil bonds is lower than estimates, OMCs will have to bear the under-recovery, to that
extent.

• In the beginning of 2008-09, the government had anticipated an issuance of bonds amounting to Rs 946
billion for an estimated under-recovery of Rs 1,800 billion during the year. The actual under-recoveries are
estimated to be approximately just half of the expected amount as crude and product prices are seen to be
cooling off in the third quarter of 2008-09.

CRISIL RESEARCH REFINING AND MARKETING IMPACT ANALYSIS, JANUARY 2009 3

• For the first half of the financial year 2008-09, the government approved the issue of bonds worth Rs 449.7
billion. Of this, the share of Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL)
and Hindustan Petroleum Corporation Limited (HPCL) is Rs 250.8 billion, Rs 105.5 billion and Rs 93.4
billion, respectively. Therefore, an additional issuance of oil bonds to the tune of Rs 165.2 billion would be
required for 2008-09, while the upstream players are expected to share an additional Rs 103.1 billion.

Table 3: Government assistance

(Rs billion) 2007-08 H1 2008-09 2008-09E Remaining 2008-09E
Actuals Percentage Actuals Percentage Projected Projected
Upstream assistance 257.1 42.1 259.3 36.6 362.3 103.1
Bonds 352.9 57.9 449.7 63.4 614.9 165.2
Total assistance 610.0 100.0 709.0 100.0 977.2 268.3
1
The amount of oil bonds represent the amount accounted for by the OMCs for the period
Source: Industry, CRISIL Research

4 CRISIL RESEARCH REFINING AND MARKETING IMPACT ANALYSIS, JANUARY 2009

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