In a significant development for India’s oil supply chain, state-owned oil marketing companies are reportedly considering paying refineries a dim price that would be even lower than the imported rates of petrol and diesel to limit mounting losses from a retail fuel price freeze.
According to a report published by PTI, this move is expected to affect most standalone refiners like MRPL, CPCL and HMEL.
Notably, international oil prices have risen from about USD 70 per barrel before the West Asia conflict to over USD 100 following the larger war in the gulf but Indian retail petrol and diesel prices have largely remained the same, forcing oil marketing companies (OMCs) to absorb the impact.
With no immediate end to the conflict in sight, OMCs are exploring ways to limit losses on fuel sales, PTI reported citing sources.
Options being considered
As per the report, one option being considered by OMCs is to either freeze or fix a discount on the refinery transfer price (RTP). RTP refers to the internal price at which refineries sell fuel to marketing arms that is less than the import-parity cost of the fuels like petrol and diesel.
According to the report, the proposed move would prevent refiners from fully passing on higher crude costs through RTP and force them to absorb a part of the impact of the enormous rise in the global oil prices the brunt of which was largely borne by OMCs alone.
While entities like Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) can by themselves offset a sizable portion of the hit between refining and marketing operations, the report published by PTI estimated that standalone refiners that rely on market-linked RTP for revenue are likely to face a tighter margin squeeze.
Standalone refiners to take the hit
According to the PTI report, the entities most vulnerable to this shift are standalone refiners such as Mangalore Refinery and Petrochemicals Ltd (MRPL), Chennai Petroleum Corporation Ltd (CPCL), and HPCL-Mittal Energy Ltd (HMEL).
Unlike the major OMCs, these refiners have a negligible retail presence. They sell the vast majority of their petrol and diesel production directly to the three state-owned OMCs.
Without a retail arm to provide a financial cushion, an RTP freeze would leave them with no way to offset the rising cost of crude oil, leading to a severe hit to their bottom line.
Traditionally, petrol and diesel in India have been priced on an import parity basis, meaning the fuels are valued as if they were imported, even though it is primarily crude oil that is brought into the country and refined locally.
Private Players in the crosshairs
The impact could ripple beyond public sector units. The PTI report indicated that the proposed discount or freeze on RTP might also extend to private refiners like Nayara Energy and Reliance Industries Ltd.
Currently, these private giants sell a significant portion of their fuel to state OMCs, who control 90% of the over 1 lakh petrol pumps across India.
As per the report, if private refiners are forced to accept lower-than-market rates, it would fundamentally distort the commitment to market-linked pricing that these players rely on for their investment stability.