A crude demand for royalty

Jan 07 2014, 02:58 IST
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SummaryThe subsidy ONGC gets on crude sales to downstream oil PSUs is not a part of its sales realisation and, hence, Gujarat’s demand for high royalty is illogical

While administrative and judicial bodies are expected to aid the process of economic reforms, they sometimes tend to obstruct the smooth conduct of business.

A case in point is the decision of Gujarat government to collect a royalty of 20% on the discount given by Oil and Natural Gas corporation (ONGC)—an upstream central oil & gas PSU—on the sale of crude to downstream oil PSUs.

The decision has been upheld by the Gujarat High Court, which has ordered ONGC to pay dues worth R5,000–6,000 crore retrospectively from 2008.

ONGC is already groaning under the debilitating effect of having to share burden of under-recoveries on the sale of oil products. In the last decade, it shelled out a massive R2,16,000 crore and is now left with a meagre cash balance of R6,000 crore (as on March 31, 2013).

Faced with a huge shortfall in reaching its target of proceeds from disinvestment in PSUs—so far it has not got even 5% of R40,000 crore it targeted—the government is also eyeing ONGC, besides other PSUs, for giving ‘special’ dividend. It is looking for money where it does not exist!

What a pathetic situation for a ‘Maharatna’ central PSU which has been generating huge surpluses year after year—thanks to its low cost of production and much higher price realisation tagged to international price of crude oil—and yet, is terribly short of internal resources!

Now, this liability of R6,000 crore would completely wipe out whatever cash is available with ONGC. No wonder, despite strong fundamentals, ONGC will have borrow massively to meet its capital expenditure—R35,000 crore per annum.

Is the royalty on ‘discount’ justified? Can obsession with revenue be pushed to a point wherein the government collects levy even on an amount that is not received by producer?

Some the basic facts, first. Until the dawn of the 21st century, petroleum products in India were covered under an administered price regime (APR).

Downstream oil PSUs, viz. Indian Oil Corporation, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd were required to sell diesel, kerosene and LPG at prices below the cost of production and distribution—apart from this, till 1997-98, supplies of naphtha, fuel oil and low sulphur heavy stock (LSHS) to fertiliser industry were also made at ‘concessional’ price.

The losses on sale of these products were cross-subsidised by surpluses generated from sale of naphtha, fuel oil, LSHS, aviation turbine fuel (ATF) to other industries at prices much higher than costs.

These inflows and

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