ONGC subsidy to HPCL crosses revenues from it

Written by Pranav Nambiar | New Delhi | Updated: Oct 7 2013, 05:34am hrs
In a curious case, ONGCs subsidy payment to Hindustan Petroleum Corporation (HPCL) in the first quarter of this fiscal was more than the upstream oil majors 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, ONGCs 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, making up for over 37% of the under-recovery compensation to the OMCs.

ONGC's cash reserves dipped by around Rs 2,500 crore last year as its contribution to OMCs for selling subsidised fuel stood at Rs 49,421 crore or 31% of the overall Rs 1.61 lakh crore under recovery figure. In the first quarter of this financial year, its share of burden rose to Rs 12,300 crore or close to 50% of overall under recoveries. Over the last 10 years, ONGC has contributed about Rs 2,16,336 crore as under-recovery and its accumulated impact to the net profits during the period was around Rs 1,25,477 crore.

ONGC recently recommended a new oil subsidy sharing formula to the oil ministry to ensure that its exploration plans are not impacted. The company's oil production has not met targets over the last five years. We suggested to the oil ministry that ONGC must contribute to subsidies only when oil prices are above $65/barrel. If the price of oil remains between $65-$100, the discount should be 85% of the price beyond $65/bbl. Further, if the oil price increases beyond $100/bbl the discount should be 90% of the price beyond $100/bbl, said the ONGC official.

ONGC reported a 34% decline in its net profit at Rs 4,016 crore in the first quarter of current year after paying Rs 12,622 crore compensation to state refiners for selling fuels below market rates.