India's top fuel retailers IOC, BPCL and HPCL have together lost around $2.25 billion (Rs 19,000 crore) in revenue in March by keeping petrol and diesel prices unchanged despite a sharp rise in crude oil prices, Moody's Investors Service said on Thursday.

Petrol and diesel prices remained unchanged between November 4, 2021, and March 21 despite prices of crude oil (raw material for producing fuel) averaging around $111 per barrel in the first three weeks of March compared to around $82 in early November.

State-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation and Hindustan Petroleum Corporation (HPCL) on March 22 and 23 raised petrol and diesel prices by 80 paise per litre each but paused the increase on Thursday.

"Based on current market prices, the oil marketing companies are currently incurring a revenue loss of around $25 (over Rs 1,900) per barrel and $24 per barrel on sale of petrol and diesel, respectively," Moody's said in a report.

If crude oil prices continue to average around $111 a barrel, the three rated entities - IOC, BPCL and HPCL - will incur a combined daily loss of around $65-70 million on the sale of petrol and diesel unless fuel prices are increased to cover the rising crude oil prices, it said.

"Based on our estimates of average sales volume between November and first three weeks of March, the state-owned refining and marketing companies together have lost around $2.25 billion in revenue on petrol and diesel sales," Moody's said.

This equates to around 20 per cent of the combined FY2021 EBITDA for the three entities.

The rating agency estimated that IOC's revenue loss to be around $1-1.1 billion while that of BPCL and HPCL to be about $550-650 million each over the same period.

"This loss in revenue will add to the short term borrowings, funded with working capital lines, of the refiners until such time that crude oil prices stay at elevated levels.

"Over time, the companies might be able to make up for some of these losses if oil prices come down," it added.

While fuel prices in India are deregulated and the refiners can pass on cost increases to the consumer, a steep price hike such as the one required under the current oil price environment will be in coordination with the government and may involve a reduction in excise duties.

"We do expect that the government will allow the refiners to adjust prices appropriately and avoid a situation where refiners continue to make losses of this magnitude for a prolonged period," it said.

Commenting on the two days of price increase, Moody's said this underpins the expectation that the price increases will be gradual and occur over a period of time rather than being a one-time adjustment.

"Until such time, the refining and marketing companies can cover the increase in feedstock costs either by an increase in selling prices or a reduction in excise duties or both, they will have to continue to absorb a proportion of the increased feedstock costs which will hurt their profitability and increase borrowings," it said.

A sustained increase in crude oil prices will also result in inventory valuation gains for the refiners, which will partially mitigate the impact of lower selling prices.

Higher crude oil prices will also result in increased working capital requirements, resulting in incremental borrowings for the refiners.

Weaker earnings combined with higher borrowings will weaken the credit metrics of the downstream companies, the rating agency said.

"A sharp rise in crude oil prices, combined with the refiners' inability to increase retail selling prices of transportation fuels in India for over four months (between November 4, 2021, and March 21, 2022) due to recently concluded elections in five Indian states, will hurt the profitability of state-owned refining and marketing companies IOC, BPCL and HPCL," it said.

High oil prices, however, will have a mixed impact on the sector.

While upstream oil and gas producers such as ONGC and OIL will benefit from higher earnings, downstream companies like IOC, BPCL and HPCL will be negatively impacted because of higher feedstock costs and increased working capital requirements.

While most state-owned oil and gas companies in India are currently devising strategies to manage carbon transition risks, these are still quite nascent.

"Most companies do not have any firm capital allocations to transition to cleaner energy sources and diversify away from traditional fossil fuels," Moody's said.?

"Companies such as ONGC, OIL and IOC have not even announced any tentative time frames to achieve carbon neutrality."

A sustained high oil price environment will incentivise consumers to transition to other energy sources. However, given India's high fossil fuel dependency, growth potential and significant developmental needs, demand for oil and gas is likely to continue growing although consumption growth rates have started to slow.

As and when absolute demand starts to decline, India will first reduce imports before lowering domestic production, it added.?