Govt rejects panel's idea on oil subsidy sharing

The petroleum ministry has rejected the crude oil matrix-based subsidy-sharing formula for Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), as suggested by the expert committee headed by Kirit Parikh. The ministry, however, wants to keep the share of these companies, along with GAIL India, at a third of total underrecoveries.

The gross underrecoveries incurred by oil marketing companies (OMCs) on selling auto and cooking fuels below the market price is expected to be around Rs 53,100 crore at a crude oil price level of $75 a barrel. Of this, the total burden on ONGC, GAIL and OIL would come to around Rs 17,700 crore this year, according to the one-third-sharing mechanism. “The upstream companies had been contributing for a third of the underrecoveries. It is the maximum that they will be made to bear this year also, depending on their financial performance,” petroleum secretary S Sundareshan told Business Standard.

A group of ministers had on June 25 partially accepted the Kirit Parikh committee report on petroleum pricing, when it decontrolled petrol prices and said diesel prices, too, would be decontrolled. It left the issue of upstream sharing open. Sundareshan said discussions on the mechanism for burden-sharing would be worked out after discussions with the finance ministry.

Since 2006, the government has been asking upstream oil and gas producing companies to share the subsidy burden of OMCs on the ground that these companies get a higher return on their production when international prices move up. ONGC’s margin on sale of crude oil is roughly $20 a barrel more than its cost of production since 2005-06, even after subsidy sharing in the form of discounts to refineries.

The three companies, which are listed entities, have raised concerns on the ad-hoc way the subsidy share is decided by the government, since it creates uncertainty for their profits. Based on a proposal from ONGC, the Kirit Parikh committee had recommended an incremental rate of taxes on higher crude oil price realisation from the nomination blocks of ONGC and OIL to keep the government’s subsidy share in the range of Rs 19,780-23,340 crore at various levels of crude, against the current practice of fixing their burden at a certain percentage, irrespective of crude oil realisation.

ONGC had also suggested a price-linked subsidy formula. “There is no decision to accept that for the reason that the levels of contribution suggested by the Kirit Parikh committee are not in consonance with the views of the government at this juncture. The upstream companies would bear a higher burden than what the committee recommended,” Sundareshan said.
 

MOUNTING BURDEN Petroleum subsidy burden on upstream companies (In Rs crore)
	ONGC	GAIL	OIL	Total
2005-06	11,958	1,064	978	14,000
2006-07	17,025	1,488	1,994	20,507
2007-08	22,000	1,401	2,307	25,708
2008-09*	27,374	1,694	2,932	32,000
2009-10	11,554	1,326	1,548	14,428
2010-11**	5,514	730	445	6,689
With total underrecovery of oil marketing companies estimated at Rs 53,100 crore, a one-third share of upstream companies would mean Rs 17,700 crore. *The figures exclude Rs 943 crore additionally paid to OMCs to compensate against import losses  **April-June quarter

ONGC Chairman and Managing Director R S Sharma had earlier told Business Standard that the petrol price decontrol and marginal increase in diesel, kerosene and LPG prices had been done on the assumption of a static crude oil price ($75 per barrel) “which unfortunately is not true”.

Both ONGC and OIL would have gained significantly, had this mechanism been accepted. In the case of ONGC, the company paid Rs 28,225 crore as subsidy in 2008-09, but, under the Kirit Parikh formula, it would have paid a subsidy of only Rs 8,200 crore. The gain to ONGC bottom line would have been Rs 11,014 crore after paying 45 per cent as royalty and tax amounting to Rs 9,011 crore.