As crude price falls, Centre halts ONGC, OIL subsidy payouts

Following a sharp decline in global oil prices, the government has decided to exempt upstream oil companies — ONGC and Oil India — from paying fuel subsidy as long as the crude prices remain below $60 a barrel and proposes to exclude GAIL India from paying any more subsidy this fiscal.

A ministry note said that after considering “suggestions” from the chief economic advisor, petroleum minister Dharmendra Pradhan approved the upstream burden share as “status quo” for the first half of fiscal 2014-15 with a respite in third and fourth quarter where no contribution would be taken from them for crude price “less than and equal to $60 a barrel”.

Last week, Pradhan approved the graded sharing mechanism where both upstream companies would have to shell out 85 per cent of the crude price exceeding $60 but less than or equal to $100 a barrel; and, 90 per cent of the crude price increase above $100 a barrel.

This would mean that exploration firms ONGC and Oil India will pay Rs 3,746 crore for third quarter of fiscal 2014-15 during which the average price of India basket of crude was $75.17 per barrel.

They would not pay any subsidy for January during which the price averaged $45.

Their payout for the remaining two months is uncertain as price opened 7.43 per cent higher at $50.20 a barrel on February 2. The ministry’s argument is: “Since the price of crude oil in international market is falling day by day and has reached $50 a barrel, it is not appropriate to ask upstream companies to contribute a discount of $56 a barrel as compensation of under recovery under the burden sharing mechanism.”

Separately, the ministry is considering excluding GAIL India from paying any subsidy during the third and fourth quarters. GAIL shared under-recovery of about Rs 1,000 crore in the first half.

The ministry has revised the under-recoveries for fiscal 2014-15 at Rs 77,594 crore of which upstream oil companies paid Rs 31,926 crore and the government paid Rs 17,000 crore. It expects the government to pick up the remaining Rs 23,590 crore of which the last year’s Budget already provides for Rs 5,336 crore.

State-run oil marketing companies suffer under recovery for selling fuels such as kerosene and LPG at a subsidised cost. There is also an outstanding subsidy of Rs 10,934 crore on diesel until last October after which its prices are market determined.