India’s oil marketing companies reeling from high interest costs

India’s three state-owned oil marketing companies: Indian Oil, Bharat Petroleum and Hindustan Petroleum, are all expecting increases in their interest costs this year, which will inevitably lead to losses. Indian Oil expects an all-time high in interest cost for this financial year, reaching 5,000 crore (US$1 billion), compared to 2,670 crore (US$543.7 million) last year. The company’s interest burden in the first six months stood at 2,521 crore (US$514 million). “While the borrowing is high this year, the interest rates are also firm. Against an average rate of 5.66% during the last financial year, we are paying a rate of 7.25% this year,” said P. K. Goyal, Indian Oil’s director for finance. Delayed government compensation coupled with rising working capital requirements have resulted in a combined borrowing of about 110,000 crore (US$22 billion). The three companies are expected to incur interest costs amounting to 8,000 crore (US$1.6 billion) , up from last year’s 4,654 crore (US$949.7 million). The global analytical company Crisil, through its research head Sridhar Chandrasekhar, said, “The mounting under-recoveries may force the OMCs into the red for the first time in their history, as the shrinking profits from their refining business will not be enough to offset the marketing losses. The gross refining margins of the OMCs fell to US$2.2 per barrel in the first half, from US$4.1 per barrel in the first half of 2010-11. Hence, timely support from the government will be critical for the OMCs to manage their liquidity.” (January 14, 2012)