Refiners Seeking Larger Margins with Exports During Fuel Shortage

Chennai: Amid the West Asia crisis, India is seeing a “contrasting phenomenon” of declining crude imports and increasing petroleum product exports as some of the refiners are exempted from windfall taxes and they are still exporting for larger margins, despite the shortage of fuel in the domestic market, finds Dhananjay Sinha, CEO and Co-head, Institutional Equities, Systematix Group.

Q) Since the start of the Iran war, crude oil supply has remained uncertain. Crude and petroleum imports were down 35 % in the month of March and this squeezed the availability of petroleum products in the domestic market. However, oil marketing companies continued export of petroleum products and exports of these products even increased by 5.88 % in March to $5 billion. What do you have to say about the situation?

There has been a significant drop in supply from the West Asia, reflected in the sharp fall in crude imports, which is impacting fuel availability in the country, especially for industrial use. The government has also restricted gas usage for industrial and commercial purposes and prices of fuels like diesel have increased. However, despite lower imports, exports have risen due to global shortages, availability of inventories with some refiners, and higher refining margins, particularly for units operating in SEZs. This has created a contrasting trend of falling imports and rising exports.

Which are the main companies exporting petroleum products and where are they exporting to?

Public sector companies like HPCL, BPCL and IOC have exported earlier, but given domestic shortages, private refiners are likely leading exports now. Reliance’s Jamnagar complex and Nayara Energy are key exporters, with destinations including the Netherlands, UAE, Singapore, Malaysia, Africa and parts of Europe.

The government had imposed windfall taxes on OMCs to curb exports and recently increased these taxes. Why did they fail earlier and will the hike have an impact now?

Earlier taxes of about ₹21.5 and ₹29.5 per litre on diesel and ATF were relatively low compared to global refining margins, so exports remained lucrative. Now rates have been raised significantly to around ₹55.5 for diesel and ₹42.2 for ATF, which could reduce incentives. However, the impact will depend on global margins—if they remain attractive, exports may continue despite higher taxes.

Why are windfall taxes limited to diesel and ATF and not all products?

The government likely identified these products as carrying higher export risk and greater implications for domestic supply, hence the targeted approach.

A large portion of exports from SEZ-based refiners, especially by the Reliance Group, is exempt from these taxes. Why does this exemption exist and should taxation be uniform?

SEZ units operate under contractual and judicial frameworks that grant tax exemptions, creating a parallel pricing system between SEZ and non-SEZ exports. This is aimed at attracting long-term investments. However, in an emergency situation with domestic shortages, there is a case for temporary measures to align export taxes and protect local supply, as seen in other countries that have imposed export restrictions.

The government has also cut excise duties to support OMCs despite them making a combined net profit of Rs 34,000 crore in the first half of last fiscal. What is the rationale?

When discounted crude, especially from Russia, was available, the government increased excise duties and retained the benefit as revenue. Now, with rising crude prices and unchanged retail prices, OMCs face under-recoveries. The excise cuts are meant to partially compensate for these losses. Essentially, the government is forgoing tax revenue to offset potential declines in OMC profits and dividends, making it a fiscal adjustment rather than a direct benefit to consumers.

What should the government do now to check exports and ensure domestic availability?

This is a dynamic situation requiring a flexible approach. The government could link export duties to the extent of domestic shortfall, impose temporary taxes even on SEZ units, or introduce export quotas. If shortages intensify or persist, stronger measures like limiting or halting exports may be considered, as seen globally.

Is suspending exports altogether a viable option at this stage?

That option is likely under consideration, especially given India’s relatively low strategic reserves. The government had placed additional expenditure of Rs 2.8 lakh crore before the Parliament and of this one lakh was earmarked for economic stabilisation fund to stabilise crude prices. If the crude remains at $100 for one year, the import bill would rise by roughly about $100 billion or Rs 10 lakh crores. It is going to be significantly higher than the one lakh crore that the government had provided for. Rs one lakh crore would be roughly covering about one, one and a half months of fuel.

Stricter controls, including export caps or suspension, may be necessary to stabilise domestic supply.

What about managing the import side of the equation?

Another option is to revisit trade arrangements, particularly regarding crude imports from Russia. With changing global trade dynamics, renegotiating on the conditions imposed by the US could ease supply pressures and reduce the need for aggressive export controls.