Govt's subsidy directive threatens ONGC profitability

The government has ordered Oil and Natural Gas Corp (ONGC) to pay a record Rs 13,796 crore fuel subsidy for the July-September quarter, a move which will dent its profitability

The petroleum ministry on Thursday issued orders asking upstream oil and gas producers ONGC, Oil India Ltd (OIL) and GAIL to give Rs 16,729.74 crore. This is to make up for 47 per cent of the Rs 35,328 crore revenue that retailers lost on selling diesel, domestic LPG and kerosene at government-controlled rates in the second quarter. It is expecting the finance ministry to make up for the remaining amount by a cash subsidy, a top official said.

Retailers like Indian Oil Corp (IOC) sell diesel and cooking fuel at rates way below cost. The losses they incur are met by government cash subsidy, as well as through support from upstream firms. Of the Rs 16,729.74 crore that upstream firms have been asked to pay for Q2, ONGC's share will be Rs 13,796 crore, while OIL will bear Rs 2,234 crore. Gas utility GAIL will pay Rs 700 crore, he said.

The subsidy ONGC has been asked to pay is 11.9 per cent more than the Rs 12,330 crore fuel subsidy outgo in the September quarter of 2012. It is also 9.3 per cent more than the Rs 12,622 crore payout in Q1 of the current financial year.

ONGC sources said the company's profitability was impacted by Rs 7,131 crore because of the subsidy in Q1 and a higher subsidy in the September quarter would severely dent it. The net profit fell 33.9 per cent in April- June to Rs 4,016 crore. Margins have already narrowed to a four-year low due to the subsidy payouts.

Fuel retailers had in Q1 lost Rs 25,579 crore on sale of diesel and cooking fuel. Of this, Rs 15,304 crore came from upstream firms (Rs 12,622 crore from ONGC, Rs 1,982 crore from OIL and Rs 700 crore from GAIL).

The finance ministry paid Rs 8,000 crore cash subsidy, leaving Rs 2,275 crore uncovered, the official said, adding the oil ministry has sought this uncovered sum as well as Rs 18,598 crore as subsidy support for Q2.

Of the Rs 16,729.74 crore that upstream firms will pay, IOC will get Rs 8,634 crore, while Hindustan Petroleum Corp will get Rs 3,909 crore. Bharat Petroleum Corp will get the remaining Rs 4,187 crore.