Upstream oil companies won’t have to give any discount on sale of crude oil to state-run oil marketers in the April-June quarter if the global (Indian basket) prices average up to $60 per barrel, according to a letter they received from the petroleum ministry. If the global price is between $60 and $100, these companies — ONGC, OIL and GAIL — will give a discount of 85% on the incremental price, and 90% if the price crosses $100.
The move, seen as a precursor to making this a permanent formula for subsidy sharing between the upstream companies and the government, is expected to substantially reduce the onus on them and help them bolster their capex programmes. ONGC, which bears the bulk of the upstream subsidy obligation, realised just $41.10 a barrel from crude sales in the first nine months of FY15. Together, the three companies bore a subsidy burden of R67,021 crore in FY14 and R42,822 crore in FY15, which were 48% and 59%, respectively, of the under-recoveries reported by the oil marketing companies in these years.
A director on board of one of the upstream companies, who confirmed to FE receiving the government’s communication, said that this mechanism was for the first quarter of FY15 and would have to be reconfirmed by the government if it had to be followed for remaining quarters of the fiscal year. However, the ministry’s letter is silent on an earlier promise that the entire domestic cooking gas subsidy for 2015-16 would be borne by the government.
The Indian basket of crude oil has average at $61.19 per barrel between April 1 and May 21. The basket average for April stood at $59.07.
According to sources, the government is closely monitoring the global crude price and rupee movement against the dollar.
The issue of subsidy sharing was discussed between officials of petroleum ministry and Ratan P Watal, expenditure secretary, and Rajiv Mehrishi, economic affairs secretary at the finance ministry. “The government is is keeping a close watch on international prices. The subsidy sharing mechanism would be monitored every quarter,” a source privy to the discussions told FE.
The rupee hovered around 63.51 against dollar on Friday. Between April 2014 and March 2015, the rupee depreciated 4.5% against the dollar. In the same period, the dollar appreciated against other major currencies in far greater magnitudes: 24% against the euro, 16% against the yen and 14% against the British pound, according to Bloomberg.
In FY15, the three state-run oil marketing companies reported under-recoveries of Rs 72,314 crore for selling diesel, domestic cooking gas and kerosene below market cost. A potential surge in oil subsidies is undermined by the decontrol of petrol and diesel and the elimination of over 3 crore bogus “subsidised household LPG connections” thanks to the direct benefit transfer scheme for LPG subsidy disbursal.
Petrol pricing was deregulated by the UPA government in June 2010. Diesel prices were increased by 50 paise a month since January 2013 (when the UPA was in power) and this process, pursued by the NDA, culminated in the decontrol of the fuel in October 2015.
Based on average crude oil price of $60 per barrel, OMCs’ LPG under-recovery for FY16 is estimated to be Rs 18,000 crore and assuming crude at $70 a barrel, it could be in the vicinity of Rs 25,000 crore. For kerosene, the under-recovery is expected to be around Rs 13,000 crore assuming average crude oil price at $60 a barrel and it could go up to Rs 16,500 crore if crude price moves northwards to around $70 per barrel.