Iraqi conflict causes concern among oil firms, airlines

Jun 17, 2014

The ongoing conflict in Iraq has pushed Brent crude prices over 4 per cent to nine-month high to $113 a barrel on Monday causing concern in the economy as well as among oil marketing companies (OMCs) and airlines that are staring at increased under-recoveries and mounting losses, respectively.

In case the unrest spills over to Southern Iraq and prices do not stabilise, OMCs are estimated to bear an additional annual burden of Rs.25,000 crore as the under-recoveries are projected to increase to Rs.6 per litre for diesel from around Rs.3 in the fortnight beginning June 1.

“We do not import any crude from Iraq but the rise in international crude prices is bad for our economy. It is a matter of great concern,” said B. K. Datta, Director, Refineries, Bharat Petroleum Corporation Ltd. (BPCL).

“We have not yet calculated the exact impact but our under recoveries will go up. Thus, we will need to deploy more cash and our borrowings will go up impacting our financials,” Mr. Datta added.

OMCs were expecting to achieve market price of diesel in six months as the government has allowed them to increase diesel price by 50 paise every month. Now this may be a distant dream.

“Indian OMCs end up carrying a higher fuel subsidy burden every time global crude prices climb or the rupee depreciates against the dollar. The only thing that could change this is if the new BJP government comes up with a roadmap for fuel price reforms — one that balances a gradual unwinding of subsidies with economic growth,” said Vandana Hari, Asia Editorial Director, Platts, a global provider of energy information and source of benchmark prices.

In June, India is to buy 290,000 barrels per day of Iraq’s Basra Light crude, the second largest importer in Asia after China.

“Any impact on India will be in the form of higher cost to its refiners, especially if Iraqi supplies are actually disrupted in part or full, resulting in global crude prices continuing to march higher,” she added.

Meanwhile, airlines which collectively lost over Rs.11,000 crore in 2013-14, and are reeling under mounting debt burden are estimating the impact. “We are worried. The OMCs have not increased ATF prices but they may pass on the additional burden by the end of this month. This will increase our losses,” said an airline executive.

Experts feel that the airlines will be in deep trouble if crude prices rise by a few more dollars.

“If it crosses $120 a barrel, the impact can be significant,” said Amber Dube, Partner and India head of Aerospace and Defence, KPMG.

“It will hurt airlines, especially in the second quarter which is the weakest quarter in terms of travel demand. Airlines have no ability to pass on the hike as it will further hurt demand. If tension escalates further, it could be very damaging for airlines,” said Kapil Kaul, CEO, South Asia, Centre for Asia Pacific Aviation.

However, some analysts believe that the crude pricing momentum could ease with international intervention.

Source: The Hindu