Expansion projects undertaken by public sector oil companies, already reeling under the burden of selling petroleum products at below market prices, have been hit by project delays and increase in prices of key inputs that will make these state-owned entities spend 38 per cent extra in the current Five-Year Plan period (2007-12).

An increase in project cost will lead to corresponding increase in borrowing needs of these companies, particularly the oil marketing firms that have already borrowed nearly 50 per cent more this year compared to last year because of rising crude oil prices.

Companies now fear this would make borrowing tougher in terms of higher interest rate and per client exposure norms of commercial banks.

"We have to continue borrowing. There is no other option. But banks will soon not be able to lend us anymore," said Indian Oil Corporation [Get Quote] Chairman and Managing Director Sarthak Behuria.

Credit rating agency Moody's and Crisil recently downgraded IOC, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corporation [Get Quote] that will make it all the more difficult for these companies to raise funds from banks. Banks can lend 25 per cent of their corpus to an individual borrower.

Nine state-owned oil companies now say it would cost them around Rs 1,20,000 crore (Rs 1,200 billion) to complete 51 projects they have undertaken in the current Plan period, as against a previous estimate of Rs 86,500 crore (Rs 865 billion), according to petroleum ministry data.

However, three of the nine reporting firms -- BPCL [Get Quote], Oil India Ltd and Mangalore Refinery and Petrochemicals [Get Quote] Ltd -- which have been implementing five projects, have said there would be no escalation in project cost.

For IOC, which is implementing 16 projects in the current Plan period, borrowings are expected to go up because of ongoing projects and loss on sale of petroleum products. Its debt level had risen to Rs 43,500 crore as of July-end, as against total debt of Rs 35,000 crore (Rs 350 billion) at the end of March 2008.

This is expected to go up to Rs 58,000 crore (Rs 580 billion) by next month. A third of these loans are long-term borrowings, IOC's Behuria said. Analysts, however, think the companies may not have enough leveraging power to raise funding for the increased project costs.

On the other hand, Oil and Natural Gas Corporation, the country's largest oil and gas producer, is comfortable with the higher costs of its 17 projects scheduled to be completed in this Plan period.

"We do not have any debt. There are no borrowing plans at the moment, but in case we need to raise money we can do so at very competitive rates," the company's Chairman and Managing Director RS Sharma said recently.

ONGC [Get Quote] will have to spend around Rs 31,701.6 crore (Rs 317.01 billion), or 15.4 per cent more for its projects than the original approved costs, data given by the companies to the petroleum ministry show.

IOC, the country's largest crude oil refiner and marketer of oil products, has seen its cost of projects scheduled to be completed by 2012 almost double to Rs 55,867 crore (Rs 558.67 billion), while HPCL's project costs have risen 31.7 per cent to around Rs 6,151.9 crore (Rs 61.51 billion).

"As oil prices have been rising, costs of setting up oil projects have also gone up. Cement and steel prices have also risen," said a senior official with IOC.

Steel prices have risen by around 50 per cent last year, while cement became dearer by around 10 per cent.

As oil price increase, it leads to increased oil exploration and refinery activities as everyone wants to profit from higher prices. Because of this increased demand, the price of rigs for oil producers and refinery machinery for refiners also rise in tandem.

Oil prices are around 50 per cent higher than a year ago, while oil input costs have risen by a similar amount. Moreover, cost of steel and cement, as well as other metals such as aluminium and copper, make up the bulk of total project costs.

But companies say that in spite of the higher costs the projects are likely to be completed as they will add to the profitability of the companies. "We cannot stop projects in the middle," said an official with HPCL, which has five projects under construction.

The projects these companies are planning for this financial year were budgeted for at the beginning of this Plan period in 2006.

The oil refiners, however, are not taking up any new projects as the burden of existing projects is already large. The marketing companies will, for instance, not set up any new petrol pumps for the next two years.