Oil ministry likely to take the subsidy yoke off Gail's back

Written by Pranav Nambiar | New Delhi | Updated: Oct 11 2013, 16:51pm hrs
GAIL India could soon be exempted from the obligation of compensating oil retailers for their under-recoveries on the grounds of being a gas transmission and marketing company and not an exploration company like ONGC and Oil India (OIL), the other two PSUs which share the subsidy burden along with the government.

The governments thinking that GAIL may be given a waiver is in sync with the proposals of some expert committees. It is prompted by the fact that the company is being forced to replace KG-D6 gas with more expensive LNG, which has resulted in its LPG and liquid hydrocarbon business recording losses in the first quarter.

According to oil ministry sources, GAIL has argued that its not in the upstream or exploration business and therefore does not get any upside from the rise in crude oil or natural gas price. The internal consensus within the oil ministry is that GAIL has a valid case in seeking exemption. In all likelihood, they will not have to contribute to under-recoveries from the next financial year. This will be subject to the approval of the finance ministry as well, said an official.

GAIL, along with ONGC and OIL, compensate the revenue that fuel retailers lose on selling auto and cooking fuel below cost. Since 2003-04, GAIL has shared the under-recoveries totalling R16,519 crore. In FY13, GAIL provided R2,687 crore as subsidy, which as a percentage of net profits stood at 61%. GAILs subsidy burden share among upstream has been steadily falling from 9.2% in FY10 to 4.5% in FY13.

This was even as the total share of upstream companies ONGC, OIL and GAIL which used to be as low as 30% in 2003-04, rose steadily and reached 60% in the first quarter of FY14, thanks to the governments anxiety to keep its budget less strained. This would mean that ONGC, which already makes little profit from sale of crude due to the obligation to give discounts to OMCs, may have a higher share of the burden to bear in the quarters to come. The glimmer of hope for ONGC is that ongoing reforms including gradual deregulation of diesel prices and the capping of subsidised LPG cylinders per household will bring down under-recoveries.

Total under-recoveries of OMCs stood at a staggering Rs 1.6 lakh crore in 2012-13.

Various government-appointed committees, including the ones headed by the Planning Commission Member, BK Chaturvedi and Kirit Parikh have opined that GAIL, which is essentially is a gas transmission and marketing company, should be kept out of the subsidy sharing mechanism.

The oil ministry official said the finance ministry will be consulted over the matter, but is confident of their endorsement of the the oil ministrys view as the subsidy burden on GAIL is not very large when compared to ONGC.

Upstream companies compensated Rs 15,300 crore or around 60% of under-recoveries in the first quarter of FY 14, of which GAIL contributed just Rs 700 crore. ONGC and OIL shared a much larger portion, contributing Rs 12,600 crore and Rs 2,000 crore respectively. The government contributed the remaining 40% worth Rs 25,580 crore.

A GAIL official said the company was aware of the development that relief was on the horizon. Analysts say the companys net profit fell 28.7% year-on-year to Rs 808 crore due to higher than estimated subsidy burden and lower-than expected margin from natural gas trading business.

GAIL has been also seeking exemption from subsidy-sharing as cheaper KG-D6 is now unavailable for LPG production. GAILs contribution to overall oil subsidies is quite small, but the contribution is leading to a serious dent in the companys profits, the GAIL official added.

After the peak of 120 mmscmd in 2010-11, GAILs transmission volume has been declining due to the fall in KG-D6 volumes. Availability of KG-D6 gas has virtually dried up for GAILs LPG production. GAIL has been forced to replace this gas with higher cost LNG. Due to higher gas costs, operating costs for LPG production have increased sharply over last two quarters and at Rs 29/kg were up 23% q-o-q and 47% y-o-y.