A virtual meeting was held on May 11, 2020 at 11:30 am with Chief Finance Officers of oil and gas companies that are member of Federation of Indian Petroleum Industry to discuss the liquidity constraints of oil companies during these trying times and to pave a way forward. The meeting was attended by Mr. Subhash Kumar, Director (F) ONGC, Mr. Sandeep Kumar Gupta, Director (F) IOC, Mr. A.K. Tiwari, Director (F) GAIL, Mr. Harish Madhav, Director (F), OIL, Mr. Harak Banthia, CFO HMEL, Mr. Anup Vikal, CFO Nayara Energy, Mr. Vivek Rathi Dy CFO Cairn Oil & Gas and Ms. Sujata Londhe, CGM, HPCL. Dr. R.K. Malhotra, DG FIPI and Mr. Rajiv Bahl, Director (F) FIPI also participated in the meeting.
The agenda of the meeting was to discuss two issues - Liquidity issues faced by the oil companies due to fluctuating oil prices and the downward trend in sales volume and additional Strategic Storage capacity over and above the existing one.
Dr. R.K. Malhotra, DG FIPI in his opening remarks gave a brief over view of the current crisis situation created by COVID-19 and the difficult phase the oil and gas industry is going through at present as also the serious challenges being encountered by the oil companies during the lockdown period. He assured the participants that FIPI would take up the issues that may be flagged during the meeting and seek support from the Govt wherever required.
Mr. Rajiv Bahl Director (F) FIPI, welcomed the participants to the meeting and gave an overview of the Agenda. The discussion was moderated by Mr. Bahl.
It was discussed that the ongoing worldwide health emergency caused by the COVID-19 pandemic has brought about a series of unforeseen challenges for us as a country. The unprecedented disruption of this scale has affected every sector and industry across the globe and has seriously affected the operations of the oil and gas companies in India in view of drop in demand, logistical constraints and sharp price drop.
The upstream sector is in its worst ever form, considering that sustaining operations is proving to be difficult. At the current low oil and gas prices, upstream companies are not able to cover their costs. Unsustainable prices coupled with incidence of Royalty & Cess and Government’s share in profit petroleum is seriously hindering the performance in terms of cash flow and liquidity management for upstream companies.
The refineries are also faced with a unique set of challenges, especially being capital-intensive low margin businesses. Specifically, there has been huge fuel demand erosion and consequent large revenue losses resulting from the lockdown. The impact is larger for inland refineries, which do not have ability to export. Further, the oil prices have collapsed leading to unmitigated inventory losses, impacting working capital, liquidity and cash flow in the immediate and shorter term, leading to massive increase in borrowings.
A variety of suggestions were made both by the upstream as well as the downstream sector in terms of the support that is required from the government.
It was desired that support form Govt. should be solicited in getting flexibility of end-use restrictions & hedging requirement on external commercial borrowings (ECB) for 3 and 5 years, similar to new ECB notification issued in October 2018 allowing Oil Marketing Companies (OMCs) to raise ECBs for working capital by extending the facility private sector refineries also. Support from Government of India was also requested for allowance of temporary retention of excise duty payments on domestic sales of oil products which would generate near term liquidity for the oil companies and would ease the tight liquidity situation currently being faced.
It was felt that Government of India should provide medium term liquidity support to the oil industry through placement of oil sector specific Sovereign Guarantee Bonds which could be issued by the oil companies with relatively modest covenants in the backdrop of current challenges in demand and profitability.
The country imports about 80% of its crude oil requirement and the remaining 20% is supplied by domestic crude oil producers. While there is a general perception that the refiners enjoy tariff protection to the extent of basic customs duty on petroleum products, it was observed that the refinery tariff protection has consistently fallen over the last few years. The overall tariff protection is just about 1 % on two fuels namely MS and HSD. It was suggested that the tariff protection should be increased from the current around 1% to at least 5 %.
It was also discussed that since petrochemicals is an important cog in the entire value chain, it is important to protect the petrochemical business for the sustenance of the value chain. An added concern was the fact that most petrochemicals plants set up in SEZs were required to pay customs duty in order to sell within the country. This meant that most companies were being forced to sell outside the country even though the Indian market is more lucrative. This situation needs to be corrected.
From the mid-stream point of view, it was discussed that a unified tariff for transportation of gas should be brought about and hence PNGRB should change the methodology of calculation for the same.
It was decided that post lockdown, a study can be undertaken on increasing strategic oil storage. Building or capacity addition of strategic oil storage is a sovereign decision and not a company decision. There are various operational costs involved in maintaining a strategic storage facility. It was also suggested to explore options for building strategic storage for natural gas.