1. ONGC, Oil India, GAIL may be spared subsidy burden

ONGC, Oil India, GAIL may be spared subsidy burden

The big reduction in oil subsidies from a level of R1.6 lakh crore in FY13 and R1.4 lakh crore in FY14...

By: | Updated: March 28, 2015 1:25 AM

The big reduction in oil subsidies from a level of R1.6 lakh crore in FY13 and R1.4 lakh crore in FY14 to about R75,000 crore in FY15 is finally coming to the help of the upstream oil companies as well.

ONGC, Oil India and GAIL (India), which together bore a subsidy burden of R67,000 crore, almost as much as the government, in FY14 and around R43,000 crore or almost twice as the government in the first three quarters of FY15, may be spared of the obligation in the last quarter.


A petroleum ministry official said on Friday that a “verbal assurance” has come from the finance ministry that says the upstream oil majors, which have seen a relentless increase in their subsidy burden until FY14, won’t have to shell out any amount (in the form of discounts on crude sales) for January-March 2015.

The Modi-led government has budgeted the highest disinvestment target of R69,500 crore for FY16. Achieving this target hinges on expeditious sales of government stakes in some maharatna firms, including ONGC, in the case of which 5% stake sale is planned. In the last fiscal, ONGC 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 (OMCs) leading to a net realisation of just $40.97 a barrel. This trend over the last few years has depleted its cash reserves.

The accompanying table shows the actual subsidy burden specific to the year borne by different stakeholders.

These figures differ from the budget figures of government’s oil subsidy because of the practice of rolling over a part of the subsidy payment obligations by the government.

The government’s oil subsidy for the next fiscal is estimated to be just R30,000 crore, thanks to expectations of benign oil prices, decontrol of diesel and the direct benefit transfer scheme for LPG subsidy disbursal. Though lately the threat of an oil shock due to the unrest in West Asia emerged, the government still hopes that the crisis would wither away and oil prices won’t skyrocket.

Petroleum minister Dharmendra Pradhan said on Friday that his ministry was working to formulate a subsidy-sharing mechanism jointly with the finance ministry. This mechanism would be based on the principal that “the profitability of the government and the companies are not impacted,” he said.

Since 2003-04, upstream oil companies including ONGC have been sharing under-recoveries of public sector OMCs wherein, ONGC’s share of under-recoveries is passed on to refineries/OMCs by way of extending discounts on sale price of crude oil, LPG (domestic) and PDS kerosene. As a result, the net retention prices (post-discount price) of ONGC are far below the international prices of crude oil.

In order to bring clarity on the subsidy sharing mechanism by upstream companies, the petroleum ministry is believed to be working towards putting in place a slab-wise mechanism. According to initial discussions, upstream players such as ONGC, Oil India and GAIL (India) need not share any subsidy burden if the average crude price hovers below $60/barrel. In case, crude prices range between $60 and $100 a barrel, firms could share 85% of the under-recoveries and 90% in case crude price crosses $100/barrel.

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