Fuel Price Freeze Hits Refiners: OMCs Consider Lower RTP

State-owned oil marketing companies (OMCs) are exploring ways to limit losses from a retail fuel price freeze. With international oil prices rising from $70 per barrel to over $100, OMCs are considering paying refineries a price lower than the imported rates of petrol and diesel.

Key Considerations:

• OMCs are considering either freezing or fixing a discount on the refinery transfer price (RTP) to limit losses on fuel sales.
• 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.

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Impact on Refiners:

• Standalone refiners such as Mangalore Refinery and Petrochemicals Ltd (MRPL), Chennai Petroleum Corporation Ltd (CPCL), and HPCL-Mittal Energy Ltd (HMEL) would be disproportionately affected by the move, as they rely on market-linked RTP for revenue.
• Private refiners like Nayara Energy and Reliance Industries Ltd would also be impacted if the freeze or discount on RTP is implemented for private refiners.

Fuel Pricing Dynamics:

• Traditionally, petrol and diesel in India have been priced on an import parity basis, meaning the fuels are valued as if they were imported.
• The government adopted trade parity pricing (TPP) in June 2006, assigning 80% weight to import parity price and 20% to export parity price.
• Despite being freed, petrol and diesel prices have not moved in line with cost and have been frozen since April 2022.

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Financial Burden:

• OMCs feel that freezing RTP would effectively distribute the financial burden across the refining ecosystem.
• However, analysts say it could disproportionately affect independent refiners with limited downstream marketing exposure, and distort the commitment of market price to standalone and private refiners.