Upstream oil firms to be spared subsidy burden

The government may completely exempt upstream oil and gas companies ONGC, Oil India

(OIL) and GAIL from contributing towards fuel subsidy this fiscal, a move that will boost their

profitability and allow them to invest in core exploration and production activities.

Sources in the finance ministry told Financial Chronicle that lower global crude oil prices and

reducing gap between sale and market price of petroleum products such as kerosene and

LPG would enable the Centre to meet the entire under recovery in the sector through

budgetary provisions in FY17, thus eliminating the need for subsidy support from upstream

companies.

The companies had already got relief by way of lower upstream subsidy contribution of only

about Rs 1,980 crore in FY16 and this year is expected to be an improvement.

“We are not taking any subsidy contribution from upstream companies in the first quarter

of current year and will soon give them clarity over the issue for the rest of the year,” the

official quoted earlier said.

The decision would come as a big relief to ONGC and OIL that are already facing squeezed

margins due to lower crude prices and are looking at all avenues to mobilise resources for

further investment in exploration and production (E&P) activities.

The companies would have had to pay close to Rs 1,500 crore – Rs 2,000 crore without any

changes in current subsidy sharing formula.

Together the three upstream companies ONGC, OIL and GAIL provided Rs 42,822 crore as

their share of subsidy contribution in 2014-15. ONGC provided Rs 36,300 crore, OIL Rs 5,523

crore and GAIL another Rs 1,000 crore. However, in the first two quarters of FY16, their

subsidy contribution fell to just about Rs 1,500 crore eliminating the need to contribute

further in the year.

The continuing lower global crude oil price, currently pegged at around $44 a barrel, has

provided cushion to the government to bear the oil subsidy burden from its budgetary

resources amounting to Rs 26,947 crore in FY17. Out of this, Rs 19,803 crore is for meeting

the gap between market and sale price of LPG cylinders and Rs 7,144 crore for kerosene.

At present, state-owned upstream oil and gas companies ONGC, OIL and GAIL are required

to make good under recoveries of oil marketing companies on the sale of poor man’s fuel

kerosene through the public distribution system (PDS). While the government has capped its

budgetary support on kerosene to Rs 12 per litre, any gap between the market price and

selling price of the fuel after the budgetary support has to be met by upstream companies.

The current gap stands at Rs 13.12 for kerosene. While this means that upstream companies

would have to bear Rs 1.12 per litre of kerosene from their pocket, the finance ministry has

now decided to absorb this gap from the budget. There is expectation that this gap would

be reduced in coming months, easing government’s position.

“The change would give us better sense to plan our future investments. But it is a fact, after

freeing up of petrol and diesel pricing and taking LPG subsidy under direct benefit transfer

scheme, our subsidy burden has already fallen sharply,” said an ONGC executive not willing

to be named.

NGS INDIA