Mumbai: Flush with cash till 2006, government owned oil marketing companies, who have been subsidising retail fuel prices despite the escalating global oil prices may well be on the verge of bankruptcy in a few weeks unless the government moves in to reverse the drain being imposed on them in a pre-election year.

Supply issues have started to surface with respect to the supply of subsidised kerosene in the public distribution system (PDS). While the open market price of kerosene hovers around Rs30 per litre, the PDS prices are subsidised at under Rs10 a litre. Kerosene forms a major cooking fuel for the poorer Indian population, who cannot afford the subsidised LPG connections distributed by the oil marketing companies, and cannt depend on firewood to cook food.

Now, the oil marketing companies would also like to see a cap on their loss making set up of LPG, or cooking gas distribution, which again is subsidised. With global shortages starting to be reported for diesel, a storm can be seen brewing at the horizon, with india having marked a 25 per cent increase in diesel consumption.

Private sector oil marketing companies have started to shut down, or roll back operations. Last week private fuel retailer Reliance Industries was forced to shut all its 1,432 petrol pumps as it could not afford to keep supplying auto fuels at subsidised rates, unlike its government-owned competitors, who are quietly heading in to the red (See: Reliance closes all its 1,432 petrol pumps; PSU oil companies' losses mount to Rs77,303 crore) 

Petrol and diesel retail sales are not covered by the subsidy offered to government-owned oil marketing companies, making it Rs10 to Rs20 more expensive than what retails at IndianOil, Bharat Petroleum, and Hindustan Petroleum outlets.

Now, with crude oil prices hitting the super spike levels of $128 plus, India would need to brace for a fuel shortage as oil marketing companies become increasingly strapped for funds and start on the final descent towards bankruptcy.

Industry sources say the oil bonds issued by the government to compensate oil marketing companies for their losses are also worthless, as they need to be sold at discount in order to raise cash to meet their working capital requirements.

The oil companies are currently forced to keep borrowing Rs3,500 crore per month to keep going. The combined borrowings for IOC, BPCL, HPCL have reached Rs65,000 crore.

The country's three oil marketing companies, IOC, BPCL, HPCL , will face collective losses in the range of Rs180,000 crore in 2008, a figure that dwarfs the Rs60,000 farm loan waiver announced by finance minister P Chidambaram in the Union Budget earlier this year. These petroleum marketing losses also need to be factored into the budget, but that would double the fiscal deficit, which is made up of borrowings needed to finance government expenditure, from 2.5 per cent to 5 per cent.

India imports almost 70 per cent of its petroleum requirements, and the subsidy sharing agreement with the government mandates that the Oil and Natural Gas Corporation (ONGC) and gas distribution company Gail need to shoulder a third of the oil marketing companies' losses. However, with ONGC's turnover for 2007-08 estimated at around Rs65,000 crore, loss sharing could take the oil refiner to the cleaners as well.

Industry sources estimate that in around two months, the oil marketing companies will reach the limit of their Rs90,000- crore borrowing limit, already having borrowed the bulk of their credit line till date to around Rs70,000 crore.

However, by around July 2008, these companies would have exhausted their lines of credit, and will have no cash to fund their business any longer, and may not even have enough to pay people working at these companies. That too, because the government insists that the prices of petrol and diesel stay at the present levels, despite Goldman Sachs predicting oil to touch $200 a barrel between now and 24 months down the line.

Forced in to upfront payments
Typically, global suppliers of crude and petroleum honour contracts against upfront payments, which is why the oil marketing companies need to borrow to the extent they have been. Once they are unable to pay up, a fuel shortage in India would be imminent, with unforetold impacts on growth, economy, and inflation.

The oil markeitng companies accrue daily losses of around Rs600 crore on the retail sales of diesel, petrol, liquefied petroleum gas (cooking gas) and kerosene. Indian Oil Corporation Ltd (IOC) the country's biggest refiner, is facing a cash crunch with daily losses from subsidised fuel sales rising to Rs320 crore ($80 million) amidst rising prices of crude oil. (See: Indian Oil sees red as daily losses mount to Rs320 crore)

Given India's pro-diesel policy for small cars, there has been a rise in the consumption of diesel within the country, with some sources estimating it to be as high as 25 per cent. Diesel shortages around the world have now pushed prices of diesel up to $160 per barrel, which makes it even more difficult for oil companies to sustain mounting losses. Also compounding the problem is that by and large, freight movement in the country is by road through trucks, which run on diesel. Any fluctuation in the price of diesel directly impacts the prices of goods, services and commodities in the country, and consequently, the wholesale and retail price indexes, and of course, inflation.

In what can be an ironic situation, private refiners Reliance and Essar have to now export diesel, since they cannot market it within India in an economically viable manner, given the subsidies that public sector oil marketing companies have. Sources say they now have no option but to export the fuel to other countries, and have resorted to shutting down and rolling back operations.

A diesel shortage in the country will first impact consumer industries such as power, shipping, rail and road transport, and telecommunications. Thereafter, the impact would spread to other sectors of the economy. The pace of the impact would be even faster, if there are accompanying upward revisions in the prices of petrol, LPG cooking gas, and / or kerosene and aviation turbine fuel (ATF).