Wednesday, Oct 22, 2014

ONGC, Oil India subsidy bill to almost halve

New Delhi | Posted: August 27, 2014 5:14 am

State-run ONGC and Oil India could see their oil subsidy burden reducing by a steep 40% to R39,200 crore in the current financial year, going by a plan formulated by the petroleum ministry.

If the plan is implemented, the upstream firms will get a much-needed respite, given their capex plans have been hit in recent years due to the heavily discounted sales of crude oil to PSU oil marketers Indian Oil, Bharat Petroleum and Hindustan Petroleum under government diktat.

Click here for graph

As per the petroleum ministry’s proposal, the OMCs’ losses — commonly known as under-recoveries — from sale of petroleum products would be shared equally between the government and the two public sector upstream companies, with the latter’s share also including the oil industry development (OID) cess they pay to the government.

In FY14, total OMC under-recoveries stood at close to R1.4 lakh crore, of which R65,121 crore or 47% was made good by ONGC and OIL, while a small portion of the burden — R1,900 crore — was borne by GAIL (India). Additionally, the duo paid OID cess proceeds of over `10,000 crore to the government. Minus a small amount (R 2,076 crore) of the losses that the three

OMCs were made to suffer, the balance became a hit to the government exchequer.

The new formula doesn’t envisage GAIL shouldering the subsidy burden (in fact, even last year, the gas marketer did not foot the subsidy bill for one quarter and a decision was taken to relieve it of the burden in future).

According to estimates made by the petroleum ministry, the under-recovery expected in FY15 would be around R98,622 crore. Half of it or R49,311 crore has to be shared by ONGC and OIL, but this would also include R10,111 crore they pay towards OID cess. The government’s subsidy burden would also be much less this year at an estimated R59,422 crore as against R70,772 crore last year, thanks to the steep reduction in under-recovery on diesel and a relatively soft crude oil price.

The caveat is that the petroleum ministry’s proposal have to be vetted by the Union Cabinet headed by Prime Minister Narendra Modi. The ministry is expected to circulate the proposal for comments from the department of expenditure in the ministry of finance, ministry of law and the Planning Commission in the next two weeks, sources said. After the views of other ministries are incorporated, the proposal would be sent for vetting by the Cabinet Committee on Political Affairs (CCPA).

In FY14, ONGC suffered the highest ever oil subsidy bill of Rs 56,384 crore. In the last fiscal, the Maharatna firm sold every barrel of crude oil for $106.72. However, it has to bear a subsidy of $65.75 a barrel to compensate state-owned oil marketing companies, leading to a net realisation of just $40.97 a barrel. The new formula is likely to boost ONGC’s net realisation on crude sales to around $47 per barrel this year, assuming an average gross crude oil price of $107 per barrel.

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