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Unable to pass on cost, oil companies take emergency steps

Updated on May 06, 2022 03:43 PM IST
Oil companies’ revenue losses on sale of auto fuels may jump further as international oil prices surged to $114 a barrel on Thursday session on the back of the EU’s move to phase out Russian energy imports.
Domestic oil companies have resorted to a range of emergency measures such as stopping credit facilities to pump owners and rationing fuel supplies to retail outlets, (PTI)
ByRajeev Jayaswal

NEW DELHI: Unable to pass on the increase in crude oil prices to consumers for the past one month on account of political pressure , domestic oil companies have resorted to a range of emergency measures such as stopping credit facilities to pump owners and rationing fuel supplies to retail outlets, taking some pumps to the verge of getting dry.

“All of sudden, some OMCs [oil marketing companies] have decided to stop the practice of supplying petrol and diesel to their dealers on credit basis,” said Hemant Sirohi, a member of the Empowering Petroleum Dealers Foundation (EPDF). He also runs a pump for state-run Bharat Petroleum Corporation Ltd (BPCL) in Meerut.

Although the credit facilities often came with interest costs up to 18%, they were part of the business culture with retail outlets, in turn, extending the facility to bulk buyers such as farmers and transporters. “Stopping the credit facility has disrupted the business chain and many dealers, particularly in rural areas are on the verge of closure as they have no cash to purchase fuel, and now banks are not giving them credit to purchase fuel due to oil market volatility and risks associated with the trade,” he said.

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A senior executive of the Delhi Petrol Dealers’ Association echoed this. “This recent trend is more prominent in smaller towns and rural areas than metros. While OMCs [referring to state-run oil companies] are withdrawing credit facilities, private refiners have reduced fuel supplies to their dealers by up to 50% to save revenue losses. Seems, PSUs [public sector undertakings] are resorting to indirect methods to cut supplies and reduce their revenue losses too,” he said requesting anonymity.

An executive of one of the private refining companies confirmed that they are reducing supplies on condition of anonymity. “We have not yet stopped supplies to our petrol pumps, but we have reduced the quantity as revenue losses are mounting. Pricing freedom in the case of petrol and diesel is a farce . While the government will eventually compensate PSU oil retailers for their losses, we have no choice but to cut our losses by reducing supplies.” A dealer for Reliance in Uttar Pradesh added: “Supply is down by 30-40% and if OMCs do not remove freeze on fuel prices, we will be forced to close the outlet.”

According to him, oil firms lose around 22 per litre on diesel and 7.5 a litre on petrol. The latest available figure at BPCL shows that while diesel for general consumers is currently sold at 104.75 per litre in Mumbai, the rate of the fuel for industrial consumers is 128.98 a litre, a gap of 24.23 per litre on Thursday. Companies’ revenue losses on sale of auto fuels may jump further as international oil prices (benchmark Brent crude) surged to $114 a barrel on Thursday session on the back of the EU’s move to phase out Russian energy imports.

The three state-run refiners – Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and BPCL – enjoy monopoly in the domestic fuel trade and control about 90% of India’s fuel retail market. They have kept petrol and diesel prices frozen since April 5 at 105.41 a litre and 96.67 (IOC, Delhi price), respectively.

IOC, BPCL, HPCL and the petroleum ministry did not respond to repeated email queries on this matter. Email queries sent to major private fuel retailers , Reliance Industries Ltd (RIL) and Nayara Energy Ltd also did not elicit any response. A spokesperson for HPCL said: “As the issue pertains to oil industry, you may take comment from SLC (IOC) on behalf of the industry.” SLC is state-level coordinator, a mechanism created by state-run fuel retailers for coordinated action.

A Jaipur-based IOC dealer said, “Companies are facing liquidity crunch, hence they are withdrawing credit facilities. But, any sharp decline in volume means dealers are heading to bankruptcy as their costs are fixed in terms of electricity charges and salaries of attendants. There is a need to raise the dealer’s margin before it is too late.”

Dealers, across Rajasthan, Punjab, Haryana, Uttar Pradesh and National Capital Territory of Delhi said customers are also cutting on fuel purchase. This is affecting sales volume, and in turn profitability as pumps have fixed costs and wafer-thin margin they said.

Monty Sehgal, spokesperson of the Petrol Pump Dealers Association Punjab said, “Many pumps are almost dry and on the verge of closure, but there is no exit policy available to them. If the government announces an exit policy for pump dealers 70% of pumps [in low-volume areas] will be closed because of thin dealer’s margin. The dealer’s margin has not been revised since August 2017.” According to IOC’s pricing data, dealer’s commission on petrol in Delhi is 3.85 per litre and 2.59 on diesel, less than 4% and 3% of their respective retail sale prices.

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