PSUs turn to private companies to meet shortfall in diesel

Public sector oil companies are finding it difficult to meet the surging demand for cheap diesel from their own refineries and increasingly turning to private refineries to meet the shortfall at their retail outlets.

M. Nene, director (marketing), Indian Oil Corporation (IOC) said, "With the demand for diesel outstripping the production of public sector refineries, we are being forced to source the product from the Reliance and Essar refineries on the west coast." He said the product is also being moved by sea from Gujarat to the eastern coast to cater for the markets of Tamil Nadu, Andhra and Orissa.

Nene disclosed that the output of IOC's Chennai refinery and Hindustan Petroleum's Vizag refinery is not enough to meet the demand in the region. This shortfall in diesel was being met through shipments from the western coast. He said the public sector oil marketing firms would have to source about seven million tonne of diesel from the Reliance, Essar and MRPL to meet the shortfall. This amount could go on rising due to the distorted price structure.

Rajkumar Ghosh, director, refineries, IOC, told Mail Today that every barrel of crude oil processed in the company's refineries can at the most yield 40 to 45 per cent of diesel while petrol accounts for 10 to 15 per cent and furnace oil, jet fuel, LPG, kerosene and bitumen make up the rest. "It is not technologically possible to change the proportion of this mix," he explained.

However, the demand for diesel has shot up to double-digit figures as motorists are switching from petrol to diesel cars and sport utility vehicles due to the huge price difference between the two fuels. With the Rs 7.50 hike in the price of petrol, the cost difference between the two fuels has risen from Rs 25 a litre to over Rs 32 per litre, which is expected to further reinforce this trend.

Diesel price at Rs 41 a litre is also much cheaper than that of furnace oil, which is sold by oil firms as an industrial fuel at Rs 56 a litre. Consequently, sectors like power, petrochemicals, steel and general trade have recorded a sharp drop in the consumption of furnace oil with several units now using cheap diesel as a substitute.

According to petroleum ministry figures, the additional volume growth in diesel constitutes about 85 per cent of total volume growth in petroleum products in March and 67 per cent that for the entire year of 2011-12.

The consumption of furnace oil fell to its lowest level in the last 20 years at 9.2 million tonne during the year ended March 31, 2012. According to Ghosh, this distorted price structure cannot continue as it is draining the resources of the oil firms and the government. He also divulged that the output cost of diesel and petrol is more or less the same and there is little difference between the prices of two fuels.

Senior Indian Oil officials feel the government should cut taxes on petrol, which account for about half the retail price of the fuel. While the Central government charges Rs 14.78 a litre as excise duty another Rs 20-Rs 30 gets added on as state levies.

The under-recoveries of oil firms on diesel have risen to Rs 81,192 crore during the year, which accounts for 58.6 per cent of the total under-recoveries of Rs 138,541 crore on diesel, kerosene and LPG during 2011-12. The figure is bound to go up if the current price structure remains in place.

Courtesy: Mail Today