State-Owned Oil Companies Navigate Challenges Following LPG Price Cut
State-owned oil companies in India are facing a complex financial situation as they grapple with the effects of a significant Rs 200 per cylinder reduction in cooking gas (LPG) prices. The government’s decision to cut LPG prices comes as a response to rising inflation and political pressures, with the upcoming assembly elections adding to the equation.
Price Cut Details
The recent price reduction translates to a lowered cost of Rs 903 for a 14.2-kg LPG cylinder in the national capital, down from the previous price of Rs 1,103. Beneficiaries under the Ujjwala scheme will pay Rs 703 after considering the ongoing Rs 200 per cylinder subsidy. However, this subsidy won’t be met by government compensation, implying that oil companies will absorb the cost.
Bumper Earnings and Benchmark Trends
State-owned companies like Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) experienced substantial profits during the April-June quarter. These profits, coupled with a decline in the Saudi Contract Price (CP) – the benchmark for domestic LPG rates due to high import dependence – from USD 732 per tonne in March to USD 385 in July, are expected to cushion the impact of the price cut.
Government’s Stance and Industry Response
Oil Minister Hardeep Singh Puri acknowledged the oil marketing companies’ decision to cut prices, attributing it to their role as “good corporate citizens.” Puri emphasized that their healthy profits from the previous quarter would support this decision. However, the government’s position on providing direct subsidy support remains unclear.
“The extension of very healthy profits from April-June in the following months will help their decision.”
Industry sources suggest that while the reduction in benchmark rates could have justified a price cut in July, the timing of the decision is political. The rise in cooking gas prices over recent years has turned it into a significant election issue. The Congress party, for instance, capitalized on high LPG prices during the assembly elections in Karnataka, promising cheaper LPG if voted into power in other states.
Impact on Subsidies
The Rs 200 per cylinder subsidy granted to Ujjwala consumers will amount to Rs 7,680 crore in the current fiscal year. While this relief benefits 9.6 crore Ujjwala beneficiaries, there are approximately 33 crore domestic cooking gas users in the country. The government had ceased general LPG subsidies in June 2020, shifting towards targeted assistance.
The only subsidy accessible was for economically disadvantaged women under the Pradhan Mantri Ujjwala Yojana, who received Rs 200 per cylinder subsidy for up to 12 refills annually. The government also provided a one-time grant of Rs 22,000 crore to cover oil companies’ previous losses from selling LPG at rates below cost. However, this support won’t be repeated this time.
Financial Performance of Oil Companies
The freeze on petrol and diesel price revisions, coupled with falling international oil prices, led to healthy profits for IOC, BPCL, and HPCL in the April-June quarter. IOC reported a net profit of Rs 13,750.44 crore, BPCL Rs 10,644 crore, and HPCL Rs 6,203.90 crore. This turnaround follows substantial losses during the same period the previous year.
While margins on petrol and diesel became positive earlier this year due to lower oil prices, rates remained unchanged. This allowed the companies to recover previous losses. Notably, LPG prices also followed a similar trajectory. The current freeze on petrol and diesel prices, lasting for 16 consecutive months, aims to shield consumers from the volatility in oil prices.
Conclusion
The recent Rs 200 per cylinder cut in cooking gas (LPG) prices has set the stage for complex dynamics in India’s oil industry. State-owned companies’ bumper earnings in previous quarters, coupled with falling international benchmark prices, will likely help them manage the impact of this price reduction. The government’s decision to not provide direct compensation indicates a shift toward companies absorbing the costs. As India navigates both economic and political considerations, the future of LPG pricing and subsidies remains a critical subject of discussion.
(This story has not been edited by Smartkhabrinews staff and is published from a syndicated news agency feed – PTI)