Govt to bear entire LPG subsidy for FY16

By: and |
Published: April 17, 2015 12:54:44 AM

In a strong push to upstream oil companies, the government has decided to bear the entire domestic cooking gas subsidy...

In a strong push to upstream oil companies, the government has decided to bear the entire domestic cooking gas subsidy in 2015-16, report Siddhartha P Saikia & Prasanta Sahu in New Delhi. The upstream players would, however, have to bear a part of the kerosene subsidy, officials in the ministries of petroleum and finance told FE.

Though companies like ONGC, Oil India and Gail India have long asked for removal of the subsidy burden on them, the immediate trigger for the move is to make the atmosphere conducive for the proposed sale of 5% stake in ONGC. Based on average crude oil price of $60/barrel, LPG subsidy for FY16 is estimated at R18,000 crore and assuming crude at $70/barrel, it could be in the vicinity of R25,000 crore.


For kerosene, the under-recovery burden is expected to be around Rs 13,000 crore assuming average crude oil price at $60/barrel and it could go up to Rs 16,500 crore if crude price moves northwards to around $70/barrel. In FY14, the under-recovery on kerosene stood at Rs 30,575 crore while it was Rs 46,458 crore for LPG.

“The government will bear the full cash subsidy on LPG while the under-recovery on kerosene will be shared with upstream companies,” one of the officials said. He said the budget allocation of Rs 30,000 crore (Rs 22,000 crore for LPG and Rs 8,000 crore for kerosene) should be enough to meet fuel subsidy bill in this fiscal.

ONGC, Oil India and GAIL (India) — forked out Rs 42,822 crore for the oil subsidy in FY15. The government paid another Rs 27,409 crore towards compensating OMCs. The subsidy burden on upstream oil companies had increased from Rs 32,000 crore (30% of the total under-recovery) in 2008-09 to Rs 67,021 crore (48% of the total subsidy bill) in FY14.

Finance minister Arun Jaitley in his Union Budget for 2015-16 estimated petroleum subsidy at Rs 30,000 crore, 50.22% less compared with the revised estimate of Rs 60,270.00 crore for 2014-15. The 2015-16 Budget estimated India’s subsidy bill at Rs 2.43 lakh crore, around 9% below the revised estimate of Rs.2.66 lakh crore for 2014-15. The reduction has been aided by the fall in the price of crude oil, the decontrol of diesel and the direct benefit transfer scheme for disbursing LPG subsidy.

The success of 5% disinvestment in India’s largest explorer ONGC is vital for the Narendra Modi-led government to meet its ambitious disinvestment target of Rs 69,500 crore. Last year, ONGC held ‘non-deal’ roadshows across Boston, San Francisco, New York and Singapore, among others. The investors raised concerns on whopping fuel subsidy burden of ONGC, which is forcing the PSU to utilise funds from its cash reserve to meet capital expenditure programme. “Overall, it is sentimentally positive for upstream companies like ONGC, Oil India and GAIL. However, looking at the current weak crude oil price scenario which implies lower realisation, we don’t foresee benefits of lower under recoveries to upstream companies. As we have highlighted earlier that subsidy sharing clarity is the only catalyst to drive the stock performance of upstream companies. If the government comes up with the firm notification on the said points than we could consider this a positive move and a step towards subsidy sharing clarity for upstream companies,” said Dhaval Joshi, analyst with brokerage Emkay Global Financial Services.

Exemption from subsidy bill would come as a big respite for flagship explorer ONGC. In the last fiscal, the Maharatna firm sold every barrel of crude oil for $ 106.72. However, it has to bear a subsidy of $ 65.75/barrel to compensate state-owned oil marketing companies leading to a net realisation of just $ 40.97 a barrel.

With the sustained subsidy burden in the last few fiscals, a large part of the ONGC’s cash reserves painstakingly built up over the years has been consumed. Over the past decade, the PSU explorer had de-leveraged the balance sheet and stood up as almost a zero-debt company. An upstream company needs a strong internal cash position to develop its assets, especially for capital-intensive deepwater acreages as well as to fund overseas acquisitions.

In line with the trend of the last few years, ONGC’s cash reserves depleted by another 24% to around Rs 10,000 crore by the end of FY14 from the level a year ago.This was even as the state-run firm squeezed capital spending for the year by about 15% from the planned Rs 35,000 crore and just Rs 3,200 crore from the reserves were used for exploration/production expenditure. The reduction in the cash position was also due to an outgo of Rs 4,000 crore to convert some unfunded liabilities — in relation to leave encashment and post-retirement benefits to employees — into funded liabilities. ONGC’s cash reserves stood at a record Rs 25,000 crore at the end of FY11.

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