Profits of the country's oil marketing companies - Indian Oil Corporation [Get Quote], Bharat Petroleum Corporation [Get Quote] and Hindustan Petroleum Corporation [Get Quote] - fell by as much as 29 per cent in 2007-08 in spite of an up to 56 per cent rise in the oil bonds these companies received during the year compared with 2006-07.

The oil bonds, which are given to these companies by the government to partially offset the adverse impact of selling petroleum products at subsidised prices, are, however, helping these companies make profits. Had these bonds not been issued, the companies would have gone into losses, which would have doubled in the last two years.

IOC, BPCL and HPCL recorded lower profits as the price of the crude oil they increased by over 60 per cent in 2007-08 but retail prices of petrol and diesel went up by 4.5 per cent, while cooking and kerosene prices remained stagnant. The retail prices of diesel, which makes up almost 40 per cent of these companies' total sales, went up by a little over 3 per cent in 2007-08 compared with 2006-07.

"Now the oil bonds are helping us make profits. But the profit levels are falling. And as our burden of the under-recovery bill rises, we could go into losses in spite of the oil bonds," said a top official with an oil marketing company.

The companies also get discounts for the crude oil and LPG they buy from Oil and Natural Gas Corporation, Oil India and GAIL India [Get Quote]. The total discounts given rose to Rs 25,708 crore in 2007-08 compared with around Rs 19,000 crore in 2006-07.

The part of the under-realisation burden that the three oil marketing companies have to bear themselves has also swollen from around Rs 9,000 crore (Rs 90 billion) to over Rs 16,100 crore (Rs 161 billion) in 2007-08. In this financial year, the three companies are projected to bear around Rs 20,000 crore (Rs 200 billion).

However, analysts say the bill could be much higher as crude oil prices continue to rise. "Our share of the under-realisation has increased four-and-a-half times in 2007-08 from the previous year. That is a primary reason why our net profit fell in 2007-08," said a senior IOC official.