ONGC sale on slippery turf as road shows flop

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Mumbai | Updated: December 13, 2014 1:19:56 AM

The 5% stake sale in the upstream oil and gas company Oil and Natural Gas Corp...

The 5% stake sale in the upstream oil and gas company Oil and Natural Gas Corp (ONGC) may be scrapped for the current fiscal year owing to “poor” or “discouraging” feedback from the Singapore and Hong Kong roadshows, said four people familiar with the matter, including one individual part of the ONGC roadshows, requesting anonymity. International roadshows were held in Boston, San Francisco, New York, London, Singapore, and Hong Kong among others.

However a senior Department of Disinvestment (DoD) official dismissed claims of suspension of ONGC’s stake sale. “Both, ONGC and Coal India disinvestment will happen this year,” the official said.

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Sources in the know told FE that investors raised concerns over ONGC’s subsidy burden, and non-resolution of subsidy-sharing issues, which will deplete the company’s cash reserves as it plans a massive capital expenditure (capex) programme including investments of R10,600 crore to further develop its Western Offshore fields.

“Investors are not willing to participate until issues on subsidy-sharing are resolved. The government may not risk launching the issue as LIC may have to bail them out, like in the previous instance,” said one of the person quoted above.

ONGC forked out R26,841 crore in April-September of FY15 towards meeting losses of the oil-marketing companies. The company suffered the highest ever oil subsidy bill at R56,384 crore. 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 per barrel of oil to compensate state-owned oil marketing companies leading to a net realisation of just $40.97 a barrel.
In FY14, government paid R70,772 crore of the total under-recovery, while upstream companies (ONGC, Oil India and GAIL) shared another R67,021 crore. The remaining R2076 crore was absorbed by three state-run OMCs — IOC, BPCL and HPCL.

According to the mid-year estimates of the petroleum ministry, the under-recovery expected in FY15 would be around R98,622 crore. If a proposal made for the Cabinet Committee on Economic Affairs (CCEA) sails through, half of the said amount (R49,311 crore) will have to be shared by ONGC and Oil India, but this would also include R10,111 crore they pay towards OID cess. Simply put, the oil subsidy bill for ONGC and Oil India would be R39,200 crore, a 41.51% drop from the previous year’s burden of R67,021 crore.  However, after the sharp decline in global crude oil prices, now the petroleum ministry expects the under-recovery in FY15 to fall further to R86,000 crore.

The temporary suspension of ONGC stake sale this year leaves the government in a lurch with respect to its ambitious FY15 disinvestment target of R43,425 crore. The ONGC stake sale could fetch R15,000 crore based on the current market price – almost one-third of government’s target.

The government is now trying to accelerate stake sale in Coal India, Rural Electrification Corporation (REC), Power Finance Corporation (PFC), and NHPC (National Hydroelectric Power Corporation) to get close to its target.

Sources in the know said REC and PFC deals could now happen as early as January and may help fetch a total of R3,000 crore-plus from both transactions. However, the Coal India is of utmost importance to the government. The 5% stake sale, which requires the Centre to resolve production-related issues and the protests by workers’ unions, could fetch the government R11,500 crore.

“Confident that REC and PFC will go through this year… Expect both deals to be concluded before the Budget. There is pressure on the government to do Coal India now. The deal may happen towards the fag-end of the fiscal year,” said another source quoted above.

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