Fuel Rationing Threat for India over Massive Subsidy Bill

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Researched by Industrial Info resources (Sugar Land, Texas)--Ever-rising fuel prices are hitting the pockets of consumers worldwide and in India there is a stand-off between public sector undertakings (PSU) oil majors and the government as to how to meet the losses incurred by the companies under the subsidy structure of the country's fuel industry. The oil marketing companies are reported by Indian business magazine "domain-b" to be losing more than $138 million per day on the sale of petrol, diesel, kerosene and liquid petroleum gas at subsidized rates. The current borrowings of state-owned Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation total $16.25 billion.

In the current fiscal year, the oil companies could face total losses of $45 billion (based on an international oil price of $125 per barrel) and faced with this bleak and massive challenge they have requested an "immediate freeze" on new liquid-petroleum-gas connections throughout the country. In addition to this proposed rationing measure, the companies want a quota of one liquid-petroleum-gas cylinder per family and a stop to imports of high-priced diesel plus the freezing of all plans for the expansion of retail fuel outlets until the situation stabilizes.

This subsidy gap squeeze comes at a time when in the electrical power sector, India PSUs and independent companies are straining to fill the supply gap by adding 78,000 MW in the 2007-12 planning period. The double fuel/power pressure puts both industrial expansion and the living standards of burgeoning middle-class households into nervous territory.

The oil exploration PSUs, the Oil and Natural Gas Corporation (ONGC), Gas India Limited and Oil India, subsidize 33% of the retail losses incurred in subsidized fuel sales and the central government partly compensates for the subsidy by issuing oil bonds. In mid-May, the Ministry of Finance rejected the Ministry of Petroleum and Natural Gas' demand for the issue of $11 billion oil bonds to meet some of the $19.25 billion losses of the oil marketing companies in 2007-08. ONGC's subsidy bill for the first quarter of 2008 is $2.1 billion, up 81.5% year over year. For the same period, Gas India owes $118 million, and Indial Oil owes $222 million.

As the market price pressures mount, India's overall plans to become a global fuel-refining hub go ahead with new projects launched and international agreements signed to ensure supplies of crude into the future. The government's Petroleum Planning & Analysis Cell (PPAC) has highlighted the positive underlying economic and commercial factors, which could enable the country to create substantial refining capacity in the near future, reported IndianPetro, an Indian information and market-intelligence firm.

PPAC focuses on the proximity of emerging markets, the proximity of Middle East crude oil sources, a pool of technical skills in the country's oil sector, the security of importing crude rather than fuel products and self-reliance in refining and the adding of value to crude imports realizing an increasingly positive balance. In 2007-08, export earnings from crude and petroleum products amounted to 31% of gross import of crude and products and 39% of crude imports. But the future is immediate and the subsidy bill bulge has to be worked through the system somehow without killing the best laid plans for the Indian industry.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.