petrol decontrol positive for oil companies: Crisil

June 28th, 2010 - 8:59 pm ICT by IANS  

New Delhi, June 28 (IANS) Credit rating agency Crisil said the decontrol of petrol price will positively impact the financial risk profiles of oil marketing companies.
However, given the sizeable under-recoveries that still exist, an institutionalised mechanism for timely sharing of subsidy will remain the need of the hour.

On June 25, the government removed control over price of petrol, allowing it to increase and decrease as per international crude oil prices. It said diesel, whose price was raised by Rs.2 per litre, will also be eventually decontrolled.

“CRISIL believes that these steps will positively impact the financial risk profiles of oil marketing companies, and gradually pave the way for the economic pricing of cooking fuels,” said a company press release.

It said that the price decontrol will “eliminate under-recoveries on petrol, reduce under-recoveries on diesel by about 50 per cent (considering the present price increase), and reduce those on liquefied petroleum gas (LPG) and superior kerosene oil (SKO) by about 15 per cent”.

It will lead to a reduction in under-recoveries of about Rs 25,000 crore. At the same time, the oil marketing companies will still have an under-recoveries burden of Rs 53,000 crore.

Crisil said that not only will the public sector oil marketing companies benefit from the decision, but the upstream companies, which share the burden of under-recoveries, will also see a decline in their extent of support.

Crisil Director Pawan Agrawal said the government’s decision will improve the cash flow position of state-run oil companies and reduce their dependence on borrowings, “though only marginally”.

He added that since “under-recoveries will remain high even after these steps are initiated, there is a need for creating an institutionalised mechanism to share the burden in a timely manner.”

Due to the absence of such a mechanism, the public sector companies have often faced difficulty in getting compensation for the under-recoveries, which are often delayed.

“CRISIL believes that either full decontrol, allowing the PSOCs to decide pricing, or an institutional mechanism that compensates the PSOCs for under-recoveries in a timely manner, is critical to restore the financial health and credit quality of the oil marketing companies,” it said.

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