Oilmin to move Cabinet to cut ONGC subsidy role

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SummaryFalling cash reserves at upstream major could hurt capex

The finance ministry might think that ONGC, as it has in recent years, would relieve it of a big part of the oil subsidy burden this fiscal, but the petroleum ministry is set to make a strong pitch for reducing the ever-increasing share of subsidies borne by the upstream oil major. Suggestions on how to reduce the subsidy burden on ONGC would figure prominently in a Cabinet note to be circulated by the petroleum ministry soon, based on the Kirit Parikh committee recommendations on pricing of petroleum products or in a separate note, official sources told FE.

ONGC’s subsidy burden has risen in recent years, not just in absolute turns but also in relation to the subsidies accounted for in the Union Budget. The company, with ambitious exploration plans to ramp up the country’s energy security, was made to forego R26,400 crore by offering discounts in crude sales to oil marketing companies (OMCs) in the first half of this financial year, when the OMCs’ under-recoveries in the period stood at R60,900 crore. That means 43% of the subsidy burden went to ONGC.

“We want to reduce the subsidy burden on ONGC, otherwise this will impact its exploration plans. At present we are considering the recommendations made by the Parikh committee as well as ONGC’s own proposal on reducing the subsidy burden. Obviously, we will need the approval of the finance ministry as well,” said an oil ministry official.

ONGC has over the last 10 years contributed over R2.3 lakh crore towards compensating oil retailers. Over the last two quarters, the company has had an average realisation of around $42 per barrel, leaving it with little profits from its oil business where the cost of production stands at around $ 40 per barrel. Currently ONGC offers a discount of $63 per barrel on crude oil sold to oil retailers Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and LPG below cost. The government compensates retailers for the remaining under-recovery that retailers incur.

The Parikh committee has suggested a slab system for upstream companies’ contributions for subsidy from 2014-15 onwards. At crude prices of up to $80 per barrel, the subsidy share of these companies — ONGC and Oil India — would stand at 40% plus 0.25% for each $1 per barrel increase beyond $80 per barrel up to $120, and for crude prices above $120 per barrel it

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