OMCs to pay discounted rates to refiners amid fuel price freeze
New Delhi: In a first since fuel price deregulation, Indian state-run oil marketing companies will pay refineries a discounted price for petrol, diesel, aviation turbine fuel (ATF) and kerosene to limit mounting losses from a self-imposed freeze on retail fuel prices, sources said.
The oil marketing companies (OMCs) on March 26 fixed rates for petroleum products that are at a discount of up to Rs 60 per litre to their imported cost, two people with direct knowledge of the matter said.
The discounted rates, which are applicable with effect from March 16, will hit standalone refiners such as MRPL, CPCL and HMEL the most.
International oil prices have risen from about $70 per barrel before the Middle East conflict to over $100, but retail petrol and diesel prices in India have remained unchanged, forcing OMCs to absorb the impact.
With no immediate end to the conflict in sight, OMCs have decided to fix a discount on the refinery transfer price (RTP) - the internal price at which refineries sell fuel to marketing arms - to effectively pay refineries less than the import-parity cost of the fuels like petrol and diesel.
For the second half of March, a discount of Rs 22,342 per kilolitre (Rs 22.34 per litre) was fixed on diesel to bring down the RTP of Rs 85,349 per kl to Rs 63,007 per kl.
For the first fortnight of April, the discount on diesel has been fixed at Rs 60,239 per kl to lower RTP from Rs 146,243 per kl to Rs 86,004 per kl.
On ATF, the RTP has been slashed to Rs 76,923 per kl from Rs 127,486 per kl after considering a discount of Rs 50,564 per kl. The RTP for kerosene after a discount of Rs 46,311 per kl has been fixed at Rs 77,534 per kl from Rs 123,845 per kl, they said.
Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp did not immediately respond to requests for comment. The discounted pricing would prevent refiners from fully passing on higher crude costs through RTP, forcing them to absorb part of the impact of elevated global oil prices.
While integrated state-run firms such as Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) can offset part of the hit between refining and marketing operations, standalone refiners that rely on market-linked RTP for revenue could face a sharper margin squeeze, they said.
Mangalore Refinery and Petrochemicals Ltd (MRPL), Chennai Petroleum Corporation Ltd (CPCL) and HPCL-Mittal Energy Ltd (HMEL) - which have negligible retail presence and sell most of the petrol and diesel produced to the three OMCs - would be the most hit by the move.
The changes would also impact refiners like Nayara Energy and Reliance Industries Ltd if the discount on RTP is also implemented for private refiners, sources said.
The two private refiners sell a bulk of their production of petrol and diesel to OMCs, who own and operate 90 per cent of the over 1 lakh petrol pumps in the country.
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. Refinery transfers of these products to oil marketing companies were based on import parity price (IPP) until June 2006, after which the government adopted trade parity pricing (TPP) - a benchmark that assigns 80 per cent weight to import parity price and 20 per cent to export parity price.
This pricing protected refinery margins, particularly of standalone refiners who didn’t have the cushion of marketing margins on petrol and diesel, whose pricing was deregulated by the government in 2010 and 2014 respectively.
Despite being freed, petrol and diesel prices have not exactly moved in line with cost and have been frozen since April 2022, with OMCs absorbing losses when crude oil prices rise and making bumper profits when rates fall. The discount on RTP comes as under-recoveries or losses on petrol and diesel have widened, sources said adding unlike cooking gas LPG, the government does not compensate OMCs for losses on
auto fuels.
