FinMin wants $56/bbl upstream subsidy: sources

The Finance Ministry has suggested upstream companies should give a discount of $56 per barrel to state fuel retailers this fiscal year, government sources said, a move that could raise their subsidy payout by over 60% from a year ago.

The Finance Minister has assumed an average global price of $110 a barrel for the fiscal to March 2012 and suggested that state oil marketing companies should absorb 5% of revenue losses on the sale of fuels, two officials with knowledge of the matter said on Wednesday.

The government fixes the retail prices of liquefied petroleum gas, kerosene and diesel to protect the poor, leading to revenue losses to Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL).

Fuel retailers are against absorbing 5% of revenue losses as a delay in releasing cash subsidy has increased their borrowings and interest burden, said the sources.

"Assuming an average rupee rate of 50 to a dollar, upstream firms' subsidy share will go up to about Rs 49,000 crore in the current year," said one of the sources.

Due to high oil prices and a depreciating rupee, oil marketing firms' revenue losses on subsidised sale of fuels are likely to rise to Rs 1.4 lakh crore in 2011-12 as against Rs 78,200 crore last year, said an Oil Ministry source.

The government compensates for some of these losses through a cash subsidy, while part is borne by the state-owned Oil and Natural Gas Corporation (ONGC), Oil India (OIL) and GAIL through a discount on sale of crude oil and products.

There is no fixed formula on subsidy sharing, leading to uncertainities for investors in the stocks of oil companies.

"This would give more clarity to the boards while approving capital expenditure plans... upstream companies feel comfortable if this is decided in the begining of the year," said a separate official.

This official also said the Finance Ministry should pay a cash subsidy of about Rs 22,000 crore to oil marketing firms to partly compensate them for revenue loss of about Rs 32,000 crore in the October-December quarter.

The revenue losses should be equally divided among government, upstream companies and consumers, he suggested.

Since a fuel price hike, including that of gasoline, is unlikely before elections in sveral states scheduled in March, and in the absence of any subsidy-sharing formula, the finance ministry should bear two-third of revenue losses, he said.

In 2010-11, cash compensation from Finance Ministry covered 52.43% of the revenue losses, discounts from upstream companies was about 38.74%, while the rest was absorbed by marketing firms and consumers.

In April-September 2011, oil marketing companies suffered a revenue loss of Rs 64,900 crore. Of this, Finance Ministry agreed to compensate for 46%, while a third was covered by upstream companies.