Oilmin to move Cabinet to cut ONGC subsidy role

Dec 26 2013, 09:49 IST
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SummaryFalling cash reserves at upstream major could hurt capex

The finance ministry might think that ONGC, as it has in recent years, would relieve it of a big part of the oil subsidy burden this fiscal, but the petroleum ministry is set to make a strong pitch for reducing the ever-increasing share of subsidies borne by the upstream oil major. Suggestions on how to reduce the subsidy burden on ONGC would figure prominently in a Cabinet note to be circulated by the petroleum ministry soon, based on the Kirit Parikh committee recommendations on pricing of petroleum products or in a separate note, official sources told FE.

ONGC’s subsidy burden has risen in recent years, not just in absolute turns but also in relation to the subsidies accounted for in the Union Budget. The company, with ambitious exploration plans to ramp up the country’s energy security, was made to forego R26,400 crore by offering discounts in crude sales to oil marketing companies (OMCs) in the first half of this financial year, when the OMCs’ under-recoveries in the period stood at R60,900 crore. That means 43% of the subsidy burden went to ONGC.

“We want to reduce the subsidy burden on ONGC, otherwise this will impact its exploration plans. At present we are considering the recommendations made by the Parikh committee as well as ONGC’s own proposal on reducing the subsidy burden. Obviously, we will need the approval of the finance ministry as well,” said an oil ministry official.

ONGC has over the last 10 years contributed over R2.3 lakh crore towards compensating oil retailers. Over the last two quarters, the company has had an average realisation of around $42 per barrel, leaving it with little profits from its oil business where the cost of production stands at around $ 40 per barrel. Currently ONGC offers a discount of $63 per barrel on crude oil sold to oil retailers Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and LPG below cost. The government compensates retailers for the remaining under-recovery that retailers incur.

The Parikh committee has suggested a slab system for upstream companies’ contributions for subsidy from 2014-15 onwards. At crude prices of up to $80 per barrel, the subsidy share of these companies — ONGC and Oil India — would stand at 40% plus 0.25% for each $1 per barrel increase beyond $80 per barrel up to $120, and for crude prices above $120 per barrel it would be 50% of crude price. ONGC, on the other hand, has recommended that the upstream companies must contribute to subsidies only when oil prices are above $65. If the price is $65-100, the discount should be 85% of the price beyond $65. Further, if oil price increases beyond $100, the discount should be 90% of the price beyond $100.

The higher subsidy burden has drained ONGC’s cash reserves, which it often dips into to meet capital expenditure needs. Though the company has an estimated capex of Rs 35,000 crore for 2013-14, it typically meets only 90% of capex targets. With an estimated cash generation of just Rs 27,000-28,000 crore this fiscal, the company will again have to use cash reserves to meet capex needs.

“Our cash reserves will fall to around Rs 5,000 crore this financial year from Rs 13,000 crore in the previous year. This is because our cash generation will fall about Rs 3,000 crore short of the company’s expenses and also because we have recently transferred around Rs 5,000 crore of pension and leave encashment amount to a trust,” an ONGC official explained.

From one-third of the OMCs’ under-recoveries in 2007-08, ONGC’s share of subsidy has grown to over 40% of the under-recoveries now. The combined under-recoveries of the OMCs is estimated to be over Rs 1.4 lakh crore this fiscal, slightly lower than the Rs 1.6 lakh crore last fiscal, thanks to a cooling off of global crude oil prices and the phased deregulation of diesel prices. The budgeted oil subsidy for this year is Rs 65,000 crore.

If ONGC’s share of the subsidy is kept at the same level in the second half as in the first half at 43%, it will have to fork out over Rs 60,000 crore in the fiscal.

“We have been assured by the oil minister that efforts would be made to reduce the subsidy burden with approval of the finance ministry and the Cabinet,” said the ONGC official, who was part of recent deliberations.

The subsidy-sharing mechanism is ad hoc in nature with the contribution of upstream companies varying every year. However, since 2011-12 ONGC has been asked to provide a fixed $63 per barrel subsidy to downstream companies, a value that does not vary with the fluctuations in crude oil price or the size of the overall subsidy burden. The three PSU companies ONGC, OIL and GAIL compensate the oil retailers for selling diesel, kerosene and LPG at discounted prices. But GAIL has now been exempted by the government from contributing in the last two quarters of FY14 as it is not an upstream player.

The Parikh committee submitted its report in late October when it recommended continuing pricing petroleum products at the trade parity pricing route. It also suggested a hike in prices of diesel by Rs 5 a litre, kerosene by Rs 4 per litre and LPG by Rs 250 per cylinder, among other recommendations.

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