Opposing the present ad-hoc fuel subsidy sharing mechanism, state-run Oil and Natural Gas Corp (ONGC) has said its profitability and cash flows will be seriously impacted if the government forces it to bear one-third of marketing companies' revenue loss on fuel sales.
Oil and gas producers like ONGC have to make good one-third of the revenues that retailers lose on selling diesel, domestic LPG and kerosene at government-controlled rates. ONGC gives discounts to IOC, BPCL and HPCL on crude oil it sells to them to make up for losses on fuel sales.
"The upstream companies' share of under-recoveries (revenue loss) has been increased from one-third (33.33%) to 38.75% for the year 2010-11 and 46.89% for Q4FY11," ONGC Chairman and Managing Director AK Hazarika wrote to Oil Secretary GC Chaturvedi.
As a result, ONGC's net realisation on crude oil sales translated into just $38.75 per barrel, the lowest in the last eight quarters, he said. "It has not only adversely affected our profits and cash flows, but also investor sentiment, reflected in fall in market capitalisation from Rs 265,520 crore to Rs 228,860 crore, i.e. By 14%."
Hazarika said ONGC should get a net crude price of $58-60 per barrel to meet its planned capital investments of Rs 30,000 crore and so, the upstream companies' share should be just 25% if crude oil prices rise above the $100 per barrel mark.
Upstream firms ONGC, Oil India and GAIL India should be asked to bear one-third of under-recoveries if crude oil stays under $70 per barrel. But if it touches $75 a barrel, their share should come down to 30%. This share should progressively fall to 25% if crude touches $100.
"If the formula of one-third under-recovery being passed on to upstream companies during the year 2011-12 when the crude prices are likely to remain over $100 per barrel is continued, this would have serious impact on the profitability and cash flows of upstream companies," he wrote.
Upstream firms contributed Rs 30,297 crore out of the total revenue loss of Rs 78,189 crore in the 2010-11 fiscal. Of this, ONGC's share was Rs 24,892 crore.
In a detailed 11-page note plus four annexures, Hazarika said ONGC's net price realisation will be $37.95 per barrel if one-third of the Rs 206,816 crore revenue loss arising at the $120 a barrel crude price is to be borne by upstream firms.
At a $100 per barrel crude price, the upstream share will be Rs 45,150 crore, of which ONGC will have to chip in Rs 37,096 crore and its net crude price realisation will be $46.26 per barrel.
Alternatively, he suggested that the government impose a special oil tax or windfall tax to take 20-80% of incremental revenues accruing over and above the crude oil price of $60 per barrel.