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Export taxes on fuels to ease domestic supplies, pressure on OMCs

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Export taxes on petrol and diesel imposed last week will curtail the queues at the fuel pumps as a supply crunch will ease. It will also minimise the strain on government-owned oil marketing companies (OMCs) to maintain supplies for nearly six million daily visitors at the retail outlets, analysts said.

The export taxes haven’t led to any change in retail fuel prices, which have remained unchanged since May 22. OMCs’ under-recoveries from retail sales of fuels are around Rs 3/litre at present.

“Margins might reduce in the short-term for refining companies and improve for fuel retailers, whose burden for sustaining the domestic market will now be shared,” said Saurav Mitra, director (energy), Crisil.

However, the marketing freedom granted to domestic oil producers may increase the cost of crude purchases for state-run OMCs, which used to be “allocated” the key raw material in fixed quantities.

Aiming to shore up domestic availability, the government imposed taxes on export of petrol and diesel at 6/litre and13/litre respectively. It also curbed exports from non-SEZ refineries. Companies exporting petrol are required to sell in the domestic market the equivalents of 50% and 30% of the petrol and diesel sold overseas in FY23.

Since PSU oil marketing companies like IOC, BPCL and HPCL don’t export much, the cap along with cess for any petrol and diesel exports from the country will ensure retail outlets do not go dry.

Of India’s 11 million metric tonne (MT) exports of petroleum products, diesel comprises 52.1% and petrol 23.2% during the April-May period of the current fiscal, data from the government arm Petroleum Planning and Analysis Cell (PPAC) showed. Exports of petroleum products increased by 14.3% during April-May 2022 as compared to the corresponding period of the previous year, mainly on increase of exports of petrol and diesel.

Overall, India exported 42% of its diesel and 44% of its gasoline production in FY22 and 40% of its diesel and 44% of its gasoline production year to date, Morgan Stanley said in a note.

The move could slow purchases of discounted Russian crude for selling in the European markets reaping higher profits.

As some states such as Madhya Pradesh, Rajasthan, Gujarat and Karnataka were facing supply shortage where the private OMCs have larger outlet concentration, the government in June expanded the scope of the universal service obligation (USO) forcing Jio-BP and Rosneft-backed Nayara to maintain sales at all petrol pumps, including in rural areas and ensure availability of fuel to the consumers at a “reasonable price”.

With brent crude at $110/bbl+ and refining cracks at $40-60/bbl, consolidated integrated auto-fuel margins are currently hovering at negative Rs 2-3/litre for OMCs compared with the normative run rate of Rs8-9/litre, Emkay Global Financial Services said in a recent report. “The Q1 average is estimated to be +Rs 4-6/litre. LPG under-recoveries for Q1 would also average at ~Rs 300/cylinder, but a seasonal cut in Aramco June LPG has lowered the same to ~Rs 100/cyinder+ for July 22,” it added. According to it, “the continuing price freeze without any indication is worrying,” though it expected “some solution in the form of a resumption of price hikes and/or subsidies.”

“Our checks with PSU refiners as well as experts indicate incremental Russian crude purchases are not big enough currently to visibly offset under-recoveries,” the analyst said.

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