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

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SummaryGAIL India could soon be exempted from the obligation of compensating oil retailers.

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 ministry’s 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 company’s 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. GAIL’s contribution to overall oil subsidies is quite small, but the contribution is leading to a serious dent in the company’s profits,” the GAIL official added.

After the peak of 120 mmscmd in 2010-11, GAIL’s transmission volume has been declining due to the fall in KG-D6 volumes. Availability of KG-D6 gas has virtually dried up for GAIL’s 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.

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