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

Jul 05 2014, 22:12 IST
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The oil major faces a Rs 3,400-crore extra royalty outgo if tax is paid on gross price of crude from April 2008 The oil major faces a Rs 3,400-crore extra royalty outgo if tax is paid on gross price of crude from April 2008
SummaryThe 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. ďSimilar implications would also arise in Assam, Andhra Pradesh and Tamil Nadu where the company is producing from onshore fields,Ē 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%

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