Editorial: Crude shock

Jun 19 2014, 00:18 IST
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SummaryA solution for ONGCs Gujarat problem is critical

Even if the government was hoping to get a bit of time before it took a decision on cutting petroleum under-recoveriesR1.6 lakh crore in FY13 and R1.4 lakh crore in FY14the situation in Iraq will make it more difficult as oil prices will continue to rise. More important, as this newspaper highlighted on Tuesday, there is a pending ONGC bill of R10,000 crore to Gujaratthe PMs home statethat needs settling and, more worrying, this could be a precedent for other state governments like Assam to make similar claims. Since the Gujarat government is pressing for an early resolution on the matter, the Central petroleum minister may not be able to postpone a resolution for too long; more important, a settlement is only fair and in keeping with prime minister Modis promise of cooperative federalism.

The claim itself is easy to explain, though unfortunate. In the past, like other oil companies, ONGC paid the Gujarat government royalties based on the price of the oil. What complicated matters, however, was that, as the levels of subsidies rose, the Centre found it was more convenient to pass on the burden to oil PSUs such as ONGC. As ONGC was getting paid a smaller amountit got $32.78 per barrel in Q4 FY14 versus the market price of $106.65 per barrelit found it was paying royalties based on the sticker price out of its pocket. The Central government then allowed it to pay royalties to the states based on the net price it got. Needless to say, Gujarat argued that ONGC bearing the Centres burden was not its problem, and it won the case in the High Court. While the case is still in the Supreme Court, in the Fiat case, the Court had ruled excise duties had to be paid on the real price and could not be lowered just because the company was offering discounts to buyersapply the same logic to ONGC, and it just has to pay Gujarat.

The problem, however, is that ONGC doesnt have the money to pay the state and, more important, it is not to blame for the problem, the Centre islogically, therefore, the Centre has to foot the bill. While finding R10,000 crore will be problem enough, it is clear ONGC will have to pay states based on the market price in future, not its net realisations. In which case, the government will have to either cut subsidies sharply

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