Sarthak Behuria, chairman, Indian Oil Corporation

Indian Oil Corporation controls about half of the domestic petroleum industry as far as marketing of products and refining of crude oil is concerned. Its share in Rs 245,000-crore anticipated gross losses this year, is only little less than half. In an interview with Jyoti Mukul, company’s chairman Sarthak Behuria gives an oilman’s perspective on the trends in oil prices and what it means for the country. Excerpts:
How do you view the volatility in the global petroleum market?
There has been a correction. Rupee is also depreciating which will help. Persistent surge in oil prices was a cause of worry. The Indian basket reached $123 a barrel yesterday and it augurs well for the Indian economy. We will manage after upstream sharing and oil bonds. I am fairly optimistic. One thing good that came out this was that for the first time, globally there is a talk about conservation. There is a realisation to curb demand.

What are the reasons behind the unprecedented increase in crude oil prices? Is it speculation and futures trading in oil or is it a genuine reflection of demand-supply mismatch?

There is a tight demand-supply situation but it is not that too many people are chasing too few barrels. Opec has been able to meet the demand. One reason was that there was a lot of demand from China. I expect the Chinese demand to fall after the Olympics. Another reason is that there is so much money with oil producers that they invested in futures of oil. Investment in areas, like real estate and capital market, are not giving as much returns due to the sub-prime crisis.

Will you seek another hike? Do you think a hike is possible especially since inflation is in double digits?

There is a committee under former Cabinet secretary BK Chaturvedi that is looking into the issue. It is very difficult to predict. Besides, inflation is very high but something has to be done in kerosene and LPG. Kerosene prices were fixed when crude oil was $25-30 a barrel but even at $100 they continue to be the same. Subsidy on it is over Rs 9,000 crore. Today LPG prices are ruling at $900 per tonne.

What are the implications of such a spike on industry especially for a firm like IOC? Do you think valuations for upstream acquisition, as also investment in other business segments done at this stage can be risky?

The three (IndianOil, BPCL, HPCL) companies can absorb up to a net
loss of up to Rs 10,000 crore. Beyond that they will show a loss. Oil price has the ability to slow down our investment. With every $1 a barrel increase, underrecovery is roughly Rs 3,000 crore. As far as valuating projects on the basis of crude oil prices are concerned, valuations are not based on current prices. There are tested methods of evaluation could be done by benchmarking. Certainly nobody assumed prices would go up to $150.

Do you think fiscal tinkering after firms factor in concessions in their valuations is justified?
Any government has the right to change the laws but the question is if we want to have a sunset clause, it should be known earlier. A definite date should be fixed after taking into account all the ongoing projects. India is known for its transparency and legal system. Same is true for tax holiday for exploration and production of natural gas.

What are your views on the windfall tax?
Everybody should be in the loop for the burden sharing. Group of standalone refineries are out of it but their overall refinery gains would be only around Rs 3,000-5,000 crore. Stand alone refineries such as Essar and RIL together make a profit of Rs 25,000-30,000 crore. Though the government will decide the quantum of tax, you cannot take away their profits. Windfall tax will meet the philosophy. Principally, it is okay but it will not solve our problem. You have to do other things.