With oil prices unlikely to rise sharply from the current level, the government may fix the subsidy for kerosene in FY17 at Rs 8-9/litre, about 30% lower than Rs 12/litre given in last fiscal, sources told fe.
For domestic LPG subsidy, which is borne entirely by the Centre, the subsidy mechanism has been tweaked to compensate oil marketing companies on an actual basis, compared with a fixed rate earlier.
Both moves are likely to further free the oil firms from any significant burden on account of oil subsidies, increasing the investors’ appetite for stocks of these companies.
According to a formula adopted for kerosene last year, any under-recovery over and above the government fixed subsidy rate, is compensated by the upstream oil companies ONGC, Oil India and Gail (India). As against Rs 12/litre in FY16, the government subsidy component is likely to be fixed at Rs 8-9 per litre for kerosene in FY17 as crude prices have declined significantly in the past one year, a senior government official said.
Since the under-recoveries in kerosene by OMCs are now about Rs 9/litre, the burden on upstream companies could be reduced significantly if prices remain largely at current levels, officials said. In fact, in the January-March quarter of FY16, upstream companies did not share any subsidy burden as the under-recoveries for kerosene were below Rs 12/litre.
Of the Rs 11,500 crore of under-recovery in kerosene, upstream companies shared only about Rs 2,000 crore and OMCs Rs 300 crore while the government picked up the tab of about Rs 9,000 crore in FY16.
On the other hand, the average under-recovery on domestic LPG declined by about 63% to Rs 11.08/kg in FY16 as against Rs 29.63/kg in FY15 as the the benchmark Brent crude oil price fell nearly 44% to an average of $48.73/barrel in FY16 against $86.6/barrel in FY15.
However, the Centre provided a subsidy of Rs 18/kg for LPG in April-October and Rs 15/kg in November-March despite lower under-recoveries by OMCs, thereby creating a buffer to meet any contingency should the prices go up.
Towards the end of FY16, the government used the buffer of about Rs 8,000-9,000 crore to settle past dues to OMCs. For 2016-17, the OMCs have been given freedom to pay subsidies to consumers up to Rs 15/kg while they would have to get finance ministry nod if it goes beyond Rs 15/kg. “No buffer would be maintained for LPG subsidy this year as oil prices are expected to remain at lower level,” another official said.
Currently, under-recoveries in LPG is around Rs 5/kg, thus giving enough flexibility to OMCs. The subsidy burden on upstream companies has been on a declining trajectory after prices were freed for petrol and diesel while the government absorbed the entire subsidy burden on domestic LPG after implementation of direct benefit transfer (DBT).
The upstream companies’ subsidy burden has declined to a mere Rs 2,000 crore in FY16 from 42,800 crore in FY15. The budget has provided Rs 26,947 crore for fuel subsidy in the current fiscal, which consists of Rs 19, 803 crore for LPG and Rs 7,144 crore for kerosene.
The better transparency and drastic reduction in subsidy burden could improve investors’ appetite for the Oil and Natural Gas Corporation, in which the government plans to sell a portion of its 68.93% stake through an offer for sale.