ONGC to be in a royal mess if states follow Gujarat cue

Written by Siddhartha P Saikia | New Delhi | Updated: Jul 6 2014, 03:42am hrs
ONGCThe oil major faces a Rs 3,400-crore extra royalty outgo if tax is paid on gross price of crude from April 2008
Oil and Natural Gas Corporation (ONGC) could face the grim prospect of having to shell out additional royalty of up to R3,400 crore if Assam, Andhra Pradesh and Tamil Nadu take their cue from Gujarat, and seek royalty on the pre-discount price of crude oil rather than the actual price it is sold at. This would be in addition to the R10,000 crore sought by Gujarat, a claim the explorer is currently fighting in the Supreme Court.

Sources told FE that ONGC would suffer a R3,400-crore extra royalty outgo if the three states claim additional royalty payments saying that the tax should have been paid on the gross (pre-discount) price of crude oil since April 2008.

According to ONGC, paying royalty on pre-discount price works out to be R10,000 crore from April 2008 till September 2013 in respect of Gujarat alone. Similar implications would also arise in Assam, Andhra Pradesh and Tamil Nadu where the company is producing from onshore fields, said a senior ONGC official.

The maharatna PSU appealed in the Supreme Court against the Gujarat High Court order of November last year. On February 13, the apex court stayed the high court order, but told ONGC to pay royalty based on the pre-discount price starting February. The dispute started way back in 2003, when ONGC started paying royalty to Gujarat on its post-discount crude oil price.

Since the PSU firm shares a chunk of the oil subsidy bill, there is a wide gap between the gross (pre-discount) and net (post-discount) crude oil price. For instance, in the January-March quarter of 2014-14, ONGC sold every barrel of crude oil for $106.65. However, after compensating government-owned oil marketing companies (OMCs) for selling fuel below market cost, the net realisation stood at just $32.78 a barrel.

In October 2003, upstream companies were directed to share under-recoveries of OMCs. However, the Centre said that the revenue of states in terms of royalty should not be affected by the discount offered to OMCs.

Based on this direction, ONGC started paying royalty to the Centre for its offshore fields at the post-discount price, while for onshore fields it paid royalty on the pre-discount price since April 2003. But ONGC realised that royalty payments to states is in excess of the statutory limit of 20% of the price realised by the company, as mentioned in the Oilfields (Regulation and Development) Act of 1948.

In fact, it was as high as 49.8% of the realised price. Since payment of royalty at pre-discount price was an additional burden on ONGC and statutory limit was breached, ONGC represented its case to the petroleum ministry.

On May 23, 2008, after consultations with the law ministry, the petroleum ministry withdrew its October 2003 order, thereby allowing ONGC to start making royalty payments to states at the post-discount price with effect from April1, 2008. According to ONGC, it paid R3,419 crore in excess royalty to Gujarat between FY04 and FY08.

On September 27, 2011, Gujarat moved the high court, asking the court to direct ONGC to pay royalty at the pre-discount price (as has been the procedure since FY04 till FY08) and demanding R5,984.87 crore for April 2008 till December 2011.

On November 30, 2011, the Gujarat High Court decided that royalty on crude oil is to be paid on the pre-discount price and directed ONGC to make good the shortfall within two months.