Output growth under serious threat due to rising subsidy: ONGC

Oil and Natural Gas Corp (ONGC) has warned its output growth and international acquisitions are under "serious threat" due to disproportionate rise in fuel subsidy burden.

Oil and gas producers like ONGC and Oil India make up for a part of losses fuel retailers incur on selling diesel and cooking fuel at government controlled rates. This subsidy payout is by way of discounts they offer on crude oil sold to them.

ONGC in a letter to the Oil Ministry said the net price realised after subsidy discounts has been falling.

As against a cost of production of $40 per barrel of oil (without considering return on investment), ONGC got a net price of $40.17 a barrel in Q1 of this fiscal.

"There has been significant reduction in ONGC's net realised prices over the years i.e. From $54.72 per barrel in FY12 to $47.85 a barrel in FY13 and to $40.17 in Q1 FY14," it said.

Since 2004, the company has paid Rs 216,336 crore in fuel subsidy, but for which its net profit would have been higher by Rs 125,477 crore that is enough to buy properties producing 10-15 million tons of oil per annum.

"Due to increasing burden of subsidy sharing, profit after tax from crude oil from nominated blocks has already eroded by almost 50% over the last three years," it said adding if the trend continues entire oil production from nominated blocks (more than 80 percent of ONGC's production) will become unprofitable.

ONGC said it needs a minimum price of $65 per barrel, without which the investments planned in redevelopment of old and ageing fields will not be commercially viable.

"We reiterate that owing to the current under-recovery sharing mechanism, ONGC's endeavours to grow domestic hydrocarbon production as well as to enhance India's energy security through international oil and gas equity are under serious threat," it said.

"ONGC needs a realisation of about $65 per barrel to generate sufficient cash to meet out our future capex plans," it said, adding the company has laid out plans to spend over Rs 163,000 crore in 12th Five Year Plan which will rise further because thrust on overseas acquisitions.

The company said if it is stripped of $56 per barrel in form of subsidy discounts, there would be significant shortfall of cash during XII Plan period.

ONGC has been dipping into its Rs 13,000 crore cash reserves to meet capex requirements.

"In fact, during FY'13, ONGC's fund/cash position dipped by more than Rs 2,000 crore in meeting its domestic capex and for FY14, the deceit is expected to be more than Rs 5,000 crore," it said.

Terming the present subsidy sharing mechanism as lop-sided, it said continuation of the existing system would hamper not only ONGC's growth plan and its long term sustainability but also country's interest.

"On the contrary, higher remunerative prices would not only improve ONGC's ability to produce incremental/ additional oil from redevelopment of particularly logistically difficult fields/ marginal fields resulting into considerable savings in import bill as explained above but would also stimulate investment into exploration as well as acquisition efforts which would ultimately translate into long term energy security of the country," it said.