November 16, 2011

Indian Oil considering refinery closures after US$1.5bn loss

Author:Samuel FenwickSource:GTForum 10 Nov 2011 Categories:Company Data

Borrowing issues and government's decision to not fully compensate Indian Oil for refining losses caused by price controls put refineries' future in doubt.
After publishing its worst ever quarterly results, Indian Oil has warned that the future of its refineries is at stake, as obtaining the necessary funds to keep them running is starting to prove difficult.

The company said: “It is getting increasingly difficult for us to borrow; we may have to shut down our refineries,” adding that product availability may become an issue if the current situation continues (NDTV).

“It will be very difficult to borrow [funds] after December. This will lead to problems in crude imports… Maybe some refineries would shut down and there would be shortage of petroleum products in the market,” Indian Oil’s chairman, RS Butola, told reporters (Financial Chronicle).

The company has reported a loss of INR74.86 billion (US$1.5 billion) for the second quarter of the 2011–2012 financial year, despite a 25.5% increase in gross turnover to INR938.68 billion. Indian Oil attributes the loss to an “increase in unmet under-recoveries and increase in interest expenditure”.

Gross under-recovery for the second quarter was reported to be INR1.176 trillion. Interest cost on borrowing alone has gone up to INR14.43 billion, while borrowing has gone up to INR732.96 billion from INR520 billion. The debt-equity ratio has deteriorated to 1.66:1 from 0.95:1.

The company’s plight owes much to government price controls, which mean that it is currently losing INR964 million a day on diesel and INR430 a day on kerosene sales. Indian Oil has also been adversely affected by the depreciation of the rupee.

Butola added: “Indian Oil’s product sales volumes, including exports, rose by 4.6% to 17.693Mt during the second quarter of 2011–12. Our quarterly refining throughput went up by 7.5% to 13.046Mt as compared to the corresponding quarter of the previous year.”

“We have not been told of any roll-back [of petrol price increases]. If [the] government asks not to raise prices, we will suggest [to the government] that we should be provided compensation.”

Indian Oil reports that its average gross refining margin for the first half of the financial year 2011–2012 stood at US$2.42/bbl, down from US$4.71/bbl YoY.

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