State-owned oil marketing companies are considering paying refineries a price lower than the imported rates of petrol and diesel to limit mounting losses from a retail fuel price freeze, according to reports from PTI. International oil prices have risen from about $70 per barrel before the West Asia conflict to over $100, while retail petrol and diesel prices in India have remained unchanged, forcing OMCs to absorb the impact. With no immediate end to the conflict in sight, OMCs are exploring ways to limit losses on fuel sales, as reported by PTI sources aware of the matter.
One option under consideration is either freezing or fixing a discount on the refinery transfer price (RTP) - the internal price at which refineries sell fuel to marketing arms - to effectively pay refineries less than the import-parity cost of the fuels like petrol and diesel, according to PTI. The proposed move would prevent refiners from fully passing on higher crude costs through RTP, forcing them to absorb part of the impact if global oil prices remain elevated. While integrated state-run firms such as Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd can offset part of the hit between refining and marketing operations, standalone refiners that rely on market-linked RTP for revenue could face a sharper margin squeeze, as reported by PTI sources.
Mangalore Refinery and Petrochemicals Ltd (MRPL), Chennai Petroleum Corporation Ltd (CPCL), and HPCL-Mittal Energy Ltd (HMEL) - which have negligible retail presence and sell most of the petrol and diesel produced to the three OMCs - would be the most affected by the move, as reported by PTI. The changes would also impact refiners like Nayara Energy and Reliance Industries Ltd if the freeze or discount on RTP is also implemented for private refiners. These refiners sell a bulk of their production of petrol and diesel to OMCs, who own and operate 90% of the over 1 lakh petrol pumps in the country. According to PTI sources, the move could distort the commitment of market price to standalone and private refiners, with sources adding that unlike cooking gas LPG, the government does not compensate OMCs for losses on auto fuels.
Traditionally, petrol and diesel in India have been priced on an import parity basis, meaning the fuels are valued as if they were imported, even though it is primarily crude oil that is brought into the country and refined locally, according to PTI. Refinery transfers of these products to oil marketing companies were based on import parity price (IPP) until June 2006, after which the government adopted trade parity pricing (TPP) - a benchmark that assigns 80% weight to import parity price and 20% to export parity price. This pricing protected refinery margins, particularly of standalone refiners, who did not have the cushion of marketing margins on petrol and diesel, as the pricing was deregulated by the government in 2010 and 2014, respectively.
Despite being freed, petrol and diesel prices have not exactly moved in line with cost and have been frozen since April 2022, with OMCs absorbing losses when crude oil prices rise and making bumper profits when rates fell, as reported by PTI. The move on the RTP freeze or discount is being examined under-recoveries or losses on petrol and diesel have widened, with sources noting that unlike cooking gas LPG, the government does not compensate OMCs for losses on auto fuels. OMCs feel the freezing RTP would effectively distribute the financial burden across the refining ecosystem, but analysts say it could disproportionately affect independent refiners with limited downstream marketing exposure.
