OREANDA-NEWS. March 30, 2011. In what is the first visible sign of the adverse impact of sustained high crude oil prices and mounting under-recoveries on integrated public sector oil companies, Bharat Petroleum Corporation Ltd (BPCL) has said it may defer its much-hyped diversification into petrochemicals and power, as the company finds it tough to raise the required funds.

BPCL had chalked out a plan to invest R50,000 crore over the next five years in projects including the diversification, but will now put part of these on the back burner. For the first nine months of the current financial year, BPCL had gross under-recoveries — or losses on account of selling retail petroleum products much below their cost — to the tune of R10,600 crore.

“We would have to defer some of our diversification plans. We need to prioritise. Those that are critical to our operations have to be taken up first,” BPCL’s chairman and managing director RK Singh told FE. This would mean the immediate priorities for the company, which has recently commissioned its 1.2 lakh barrels per day Bina refinery, would be to augment its marketing infrastructure, and invest in existing upstream operations.

Of the total planned investment by BPCL over the next five years, R20,000 crore was earmarked for the refinery segment. In the upstream sector, where the company has entered exploration and production (E&P) through Bharat PetroResources Ltd, it will spend R10,000 crore. Yet another R10,000 crore was earmarked for its diversification plans, including R5,000 crore for petrochemicals. The remaining was to be spent on beefing up the company's marketing infrastructure.

State-run oil marketing companies (OMCs) including BPCL, Indian Oil Corporation and Hindustan Petroleum are likely to collectively lose around R1.2 lakh crore for the financial year 2011-12 on account of under-recoveries. However, the government has so far set aside a provision of only R23,600 crore in the recent Union budget as compensation.

The government has been compensating these OMCs earlier by issuing bonds, and now through cash, but the compensation comes with a time lag. This means that in the interim period OMCs have to resort to heavy borrowing to carry out their operations. “Our borrowing has gone in excess of R22,000 crore. Moreover, in order to control inflation, RBI has increased interest rates, and it hovers around 9-9.5%, which would take our interest costs up. This year, with all the borrowing we had so far, our interest cost will be around R1,200 crore,” Singh said, adding that the company needs to make profits between R2,000 crore and R3,000 crore every year to meet its projected investment plans through a combination of internal accruals and debt.

For the quarter ended December, BPCL had reported a sharp 50.57% dip in its net profit at R187.38 crore. Added to all this, the government has not allowed OMCs to increase the price of petrol in recent months, despite it being decontrolled. This alone has put an additional strain of R600 crore on BPCL.

“The government has to either raise product prices, go in for duty restructuring or continue to compensate us so that we remain afloat in terms of profits and margins,” Singh said, adding that the government has assured that the company would be adequately compensated. Crude oil prices have been hovering around the USD 115 mark for several weeks now, and have showed no signs of cooling, despite the unfortunate events in Japan. This is because of the unrest in West Asia and North Africa.