Oilmin to move Cabinet to cut ONGC subsidy role

Dec 26 2013, 09:49 IST
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SummaryFalling cash reserves at upstream major could hurt capex

would be 50% of crude price. ONGC, on the other hand, has recommended that the upstream companies must contribute to subsidies only when oil prices are above $65. If the price is $65-100, the discount should be 85% of the price beyond $65. Further, if oil price increases beyond $100, the discount should be 90% of the price beyond $100.

The higher subsidy burden has drained ONGC’s cash reserves, which it often dips into to meet capital expenditure needs. Though the company has an estimated capex of Rs 35,000 crore for 2013-14, it typically meets only 90% of capex targets. With an estimated cash generation of just Rs 27,000-28,000 crore this fiscal, the company will again have to use cash reserves to meet capex needs.

“Our cash reserves will fall to around Rs 5,000 crore this financial year from Rs 13,000 crore in the previous year. This is because our cash generation will fall about Rs 3,000 crore short of the company’s expenses and also because we have recently transferred around Rs 5,000 crore of pension and leave encashment amount to a trust,” an ONGC official explained.

From one-third of the OMCs’ under-recoveries in 2007-08, ONGC’s share of subsidy has grown to over 40% of the under-recoveries now. The combined under-recoveries of the OMCs is estimated to be over Rs 1.4 lakh crore this fiscal, slightly lower than the Rs 1.6 lakh crore last fiscal, thanks to a cooling off of global crude oil prices and the phased deregulation of diesel prices. The budgeted oil subsidy for this year is Rs 65,000 crore.

If ONGC’s share of the subsidy is kept at the same level in the second half as in the first half at 43%, it will have to fork out over Rs 60,000 crore in the fiscal.

“We have been assured by the oil minister that efforts would be made to reduce the subsidy burden with approval of the finance ministry and the Cabinet,” said the ONGC official, who was part of recent deliberations.

The subsidy-sharing mechanism is ad hoc in nature with the contribution of upstream companies varying every year. However, since 2011-12 ONGC has been asked to provide a fixed $63 per barrel subsidy to downstream companies, a value that does not vary with the fluctuations in crude oil price or the size of the overall subsidy burden. The three PSU companies ONGC, OIL and GAIL compensate the

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