Govt proposes oil cess be used for subsidy

The Oil Industry Development (OID) cess, levied on oil producing companies since 1974, is likely to be used for sharing the subsidy on petroleum products. The cess is levied on the nominated fields of Oil & Natural Gas Corp and Oil India Ltd.

The petroleum ministry has proposed the two upstream companies be relieved of the subsidy burden to the extent of the OID cess. The ministry has argued the cess be used to facilitate more investments in exploration and production.

Oil marketing companies currently sell diesel, liquefied petroleum gas and kerosene at government-controlled rates lower than market prices. The loss is offset by the government through cash subsidy and upstream firms through discounts on crude oil purchases.

The share of upstream firms has increased from 30 per cent (Rs 32,000 crore) in 2008-09 to 48 per cent (Rs 67,000 crore) of the total under-recoveries in 2013-14. "Diversion of funds of upstream companies to cover under-recoveries of OMCs, instead of investments in exploration, puts energy security at risk," said an official.

ONGC and OIL also pay over Rs 4,500 crore per tonne as cess on crude oil production apart from the 20 per cent royalty to states on the pre-discounted price of crude oil, adding to their burden. According to the proposal, the gross under-recoveries would be divided equally between the government and upstream companies.

The OMCs' gross under-recoveries on subsidised sales of petroleum products are estimated at Rs 98,622 crore in the current financial year. According to the proposed changes in the subsidy sharing mechanism, the upstream firms' share, 50 per cent of net under-recoveries, works out to Rs 49,311 crore. After deducting the OID cess of Rs 10,111 crore on crude oil, their share of the subsidy burden would come down to Rs 39,200 crore.

Based on the new proposal, the subsidy discounts to OMCs would be $35.65 per barrel considering a crude oil price of $107 per barrel. The new method would improve upstream firms' net realisation to $47.1 per barrel - after accounting for cess, royalty and value added tax (VAT) -- as against ONGC's $32.7 per barrel and OIL's $32 per barrel currently.

The new subsidy sharing mechanism would be placed before the cabinet soon for its approval along with the other proposal to decontrol diesel prices once the Rs 1.78 per litre under-recovery on the fuel are eliminated.