ONGC subsidy to HPCL crosses revenues from it

Oct 07 2013, 00:04 IST
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SummaryONGC will thus have to make good additional payment of Rs 800 crore to HPCL.

In a curious case, ONGC’s subsidy payment to Hindustan Petroleum Corporation (HPCL) in the first quarter of this fiscal was more than the upstream oil major’s gross realisation from selling crude to the oil marketing company. Thanks to a government fiat, ONGC, hit hard by the relentless increase in its share of the subsidy burden, released R3,300 crore to the refiner in Q1 as subsidy while the revenue from selling crude to the OMC was only R3,000 crore.

Had the government stuck to the formula it applied in the previous quarters to determine the discount ONGC requires to give HPCL on purchase of crude from the oil producer, the subsidy payment in the quarter would have been around R2,500 crore. ONGC will thus have to make good the additional payment of R800 crore to HPCL.

ONGC officials say the company has been pulled up by its auditors for this anomaly, which is hardly caused by it. The company has subsequently approached the oil ministry asking for a re-look at the methodology for the allocation of subsidy payments to ensure that the discount due to the oil marketing company does not exceed revenues due.

“This has happened in the previous financial year as well. Typically, the subsidy is adjusted in the fourth quarter in such a manner that the subsidy due to all the three 3 refiners are less than revenues received from them,” said a senior ONGC official.

As oil retailers — IOC, BPCL and HPCL — sell diesel, LPG and kerosene at subsidised rates in the retail market, they are compensated for the under recoveries by upstream companies and the government.

The subsidy-sharing mechanism has been inconsistent and ad hoc over the years. The share of upstream companies — ONGC, OIL and GAIL — used to be as low as 30% in 2003-04. In the first quarter of FY14, it went up to as high as 60%.

Hardly making any money from sale of crude oil, ONGC’s profits are due to its gas and petrochem business.

ONGC's overall subsidy contribution stands at $63 per barrel and this is divided between the three oil retailers. In the first quarter, ONGC's realisations fell to $40.17 while the cost of production stands at around $40, leaving very little margins for the company. Upstream companies contributed Rs.15,304 crore, amounting to about 60% of the total under-recovery subsidy of Rs. 25,578.57. In 2012-13, upstream companies contributed Rs 60,000 crore,

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