Royalty liability: milching of ONGC, OIL ends

In an unprecedented move, the government has exonerated its undertakings in the oil sector — Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) from a potential liability of about Rs 22,000 crore in royalty dues to Gujarat and Assam governments.

ONGC had to pay Gujarat Rs 8,392 crore and Assam Rs 1,404 crore in royalties for the period April 1, 2008 and January 2014. Together with interest Rs 2,868 crore, the total liability was Rs 12,664 crore. OIL had to pay to Assam Rs 4,902 crore in royalty dues plus Rs 4,355 crore in interest adding to Rs 9257 crore.

The Union government has settled this pending liability of ONGC and OIL by paying the royalty amount Rs 14,698 crore directly to the two state governments which won’t insist on levy of Rs 7,223 crore interest for the mentioned period.

This benevolence showered on ONGC and OIL stands in sharp contrast to their continuous plunder by the successive political establishments in the past via dividend/special dividend, buy-back of shares, sale of crude oil to downstream state oil marketing companies at discount etc if only to meet burgeoning fiscal deficit of the central government.

To put things in perspective, some basic facts are in order. Until the dawn of 21st century, petroleum products in India were covered under an administered price regime (APR).

Downstream oil PSUs such as the Indian Oil Corporation, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited were required to sell diesel, kerosene and LPG at prices below the cost of production and distribution. Apart from this, till 1997-98, supplies of naphtha, fuel oil and low sulphur heavy stock (LSHS) to fertiliser industry were also made at ‘concessional’ prices.

The losses on sale of these products were cross-subsidised by surpluses generated from the sale of naphtha, fuel oil, LSHS and aviation turbine fuel (ATF) to other industries at prices much higher than costs. These inflows and outflows were administered through the Oil Pool Account (OPA).

In 2002-03, based on recommendations of the Vijay Kelkar Committee, the then NDA government dismantled the APR. Even as it continued the sale of diesel, kerosene and LPG at low prices, it bowed to the pressure of paying subsidies ‘directly’ from the Union Budget. The objective was to make these subsidies ‘transparent’ and ‘focused’. This was also a precursor to a phased programme for progressive elimination in a time bound manner. But, this euphoria was short-lived.

The government under UPA was never serious about reducing subsidies. Yet, it was keen on avoiding stress on the Budget. Therefore, it came up with an ingenious idea of directing ONGC and OIL to offer discount on supply of crude to downstream oil PSUs. Accordingly, ONGC and OIL started giving discount from 2003-04, a policy which continued till first half of 2015-16.

According to the Oil Field Act (OFA), ONGC and OIL are required to pay a royalty of 20% on market value of crude oil they extract from oil blocks/fields to the state in which oil is produced. Initially, the former paid royalty to the latter on pre-discount sale price till March 31, 2008. From April 1, 2008, under instructions from the oil ministry, this was paid on post-discount sale price.

For a couple of years, the Gujarat government accepted payments on the above basis. However, in 2011, it started insisting payment on pre-discount price and filed a writ petition in the Gujarat High Court (GHC). The GHC accepted state’s contention and vide its November 2013 order, directed ONGC to pay royalty on pre-discount price.

The oil major challenged the above order in Supreme Court (SC) which in February 2014 granted stay against it on the condition that ONGC will pay royalty  on pre-discount price of crude oil with effect from February 1, 2014. Meanwhile, the Government of Assam had also taken up the same matter in Gauhati High Court.

Pre-discount price

In this backdrop, the Government of India (GOI) volunteered to pay the arrears for past period April 1, 2008 to February 1, 2014 directly to the two states (for the period thereafter, ONGC anyway was paying to Gujarat on pre-discount price as per SC interim order). Pursuant to this, the SC disposed off the case on February 20, 2017.

Without doubt, the Narendra Modi dispensation has injected an air of freshness in the way PSUs are managed. In the instant case, apart from exonerating ONGC and OIL of the mammoth royalty liability, it has also taken yet another bold step of freeing them from the burden of giving discount on their sale of crude to downstream oil PSUs from 2016-17.

In the past, due to this factor alone, the ONGC had faced substantial deterioration in its internal finances (during 2004-2014, it made a cumulative contribution of over Rs 2,16,000 crore by way of discount on crude sale). As a result, at one point — March 31, 2013 — its cash balances had plummeted to a low of Rs 6,000 crore as against its capital expenditure requirement of Rs 35,000 crore annually.

By unshackling this ‘Navratna’ undertaking from the perennial discount liability, the Centre has taken a big step forward in boosting its internal resource capability. This is more so at a time when it has to fund its massive investment plans for exploration and development of oil and gas fields in India’s drive for increasing indigenous production of hydrocarbons for enhancing energy security.

In his Budget speech for 2017-18, Finance Minister Arun Jaitley has alluded to creating two or three integrated oil and gas companies — from amongst the existing PSUs — which can compete with global energy majors. In this big leap forward, ONGC and OIL will have to play a major role. From this perspective also, both the decisions — extinguishing royalty liability and freeing them from the burden of discount on crude sale — are very timely.

Hopefully, the government will stay on course in the overarching interest of keeping these PSUs robust and healthy.

(The writer is a New Delhi-based policy analyst)