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Refinery margins fuel profit-spill for firms

New Delhi, March 20: Riding on the back of higher refinery margins, national oil companies are expected to post comfortable profits during the last quarter of the current financial year even though crude prices have been rising since January and domestic prices of petrol and diesel have not been raised.

Oil companies such as Mangalore Refinery and Petrochemicals Ltd (MRPL) and Reliance, which have refineries but no marketing divisions, will be the biggest gainers from this trend.

The refinery margin for Indian Oil Corporation has reportedly risen to $8 per barrel during the last two months when crude prices surged.

Going by this trend, the company is expected to finish the year with an average refinery margin of over $5 per barrel. The refinery margin was $2.79 per barrel during the last financial year.

The demand for bitumen in the country outstrips supply because of the ongoing national highway development project and this assures oil companies of firm prices as well. Similarly, the prices of other petrogoods such as furnace oil and naphtha have risen more than crude prices in the international market leading to higher refinery margins.

In addition, Indian Oil Corporation will be processing around 37 million tonnes of crude during the current fiscal compared with 35 million tonnes processed last year. This additional throughput of 2 million tonnes will also contribute towards a higher profit.

On the flip side, the profits of the marketing divisions of the oil companies will be lower by about Rs 3,500 crore which they would have raked in if they had been allowed to sell petrol and diesel at import-parity prices. IOC, which has a little over 50 per cent of the retail market share, will take a hit of around Rs 1,800 crore.

Although the marketing segment of IOC will make a lower profit than it would have otherwise made if it was allowed to raise the prices of petrol and diesel, the refinery division will gain due to the higher margins and larger throughput.

However, IBP, which is purely a marketing company, and does not have a refinery will be making smaller profits.

The refinery margin at MRPL is reported to be over $5 per barrel. MRPL has a lower refinery margin than IOC because it exports over 40 per cent of its output. Export prices are far lower than domestic prices.

IOC, on the other hand, sells most of its products in the domestic market where price realisations are higher by Rs 1,000 per tonne because of the customs duty protection.

Similarly, Reliance Industries also reaps this advantage as it has a two-year agreement with the national oil companies to lift its products. With the agreement set to expire this month, the company is now lobbying hard to get the public sector oil companies to pick up a greater share than they actually want to.

Indian Oil Corporation has made a net profit of Rs 5,155 crore during the first nine months of the current fiscal which is 31.7 per cent higher than the Rs 3,915 crore the company earned in the corresponding period last year.

IOC had to forego as much as Rs 3,300 crore as its part of the subsidy burden for LPG and kerosene. However, it received Rs 1,100 crore from ONGC and Gail India which were also asked to share the subsidy burden of these two cooking fuels.

The current level of petrol and diesel prices have been fixed when crude prices ranged between $27 to $28 price band. These prices have now shot up to over $30 per barrel. It is, therefore, likely that once the elections are over the oil companies will be allowed to raise prices to bring them in line with international prices.

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