Oil exploring cos to bear larger share of subsidy

Total loss in 2010-11 at Rs 78,159 crore

Oil exploring cos to bear larger share of subsidy

So far the three upstream state-owned oil and gas exploration companies, ONGC, GAIL and Oil India Limited, have been bearing nearly one third (33.33 per cent) of the total revenue losses being incurred by PSU oil marketing firms, namely IOC, BPCL and HPCL by selling crude oil to them through discounts.

The government’s move to enhance the oil subsidy burden of the state-owned upstream oil companies is primarily to reduce the government’s subsidy burden on oil products, a move to help fiscal consolidation, sources in the Petroleum Ministry said. However, the decision to enhance the oil subsidy burden of upstream oil and gas exploration firms is going to adversely impact the proposed plan of ONGC to go for Follow-on Public Offering (FPO). The government has been planning to sell 5 per cent of its shares in ONGC through (FPO) route.

With the enhanced oil subsidy burden the ONGC may not be able to raise the desired amount of fund from the market, market analysts say. As per an estimate, the state-owned oil marketing firms have made a revenue loss of nearly Rs 78,159 crore in 2010-11 by selling diesel, domestic LPG and kerosene below cost prices.

Under the enhanced oil subsidy burden sharing mechanism, ONGC has been asked to contribute nearly Rs 24,892.43 crore for the fiscal 2010-11.ONGC’s share price is on the decline in the wake of rising subsidy burden.

“We have just come to know that our subsidy contribution for 2010-11 fiscal will be 38.80 per cent instead of one-third subsidy we had been sharing for past four years,” ONGC Chairman and Managing Director A K Hazarika said.

“We will be giving Rs 3,832 crore more in subsidy than we had projected earlier. Our profits will be adversely impacted by Rs 2,000 crore due to this additional subsidy outgo,” he said. Asked whether the enhanced subsidy burden will have a bearing on the timing of the launching of the ONGC’s FPO he said “it is for the Department of Disinvestment to decide the timing. We were told that the FPO would happen in first week of July. Accordingly we are prepared.”

The ONGC, which has been critical of the ad-hoc subsidy mechanism,  has been persistently demanding that the government should come out with a transparent policy in the larger public and shareholder interest.

Under the existing subsidy sharing mechanism upstream firms bear nearly one third of the revenue losses incurred by the state-owned oil marketing firms, while the government compensates the other one third of losses through cash subsidy. The remaining revenue losses are being borne by the oil marketing firms themselves.

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