Oil marketers get a reprieve

But the extra subsidy burden will stress fisc.

With the Centre developing cold feet on increasing diesel prices, the finance ministry may give in to the petroleum ministry demand for increasing the government’s share in petroleum subsidy. The government is clearly caught in a pincer grip: it cannot hike diesel rates with food inflation touching a 10-week high, nor can it ask FPO-bound Oil & Natural Gas Corporation (ONGC) to bear a higher share of subsidy.

The increase in the government’s subsidy bill could put the fisc under stress, since the government underestimated the petroleum subsidy in February. It provided for only Rs 3,108 crore for the current year in the Budget, but was forced to provide an additional Rs 14,000 crore on this account in the second supplementary demand. Though it draws comfort from the Rs 106,317-crore windfall from the auction of 3G and BWA spectrum, it has already spent Rs 74,401 crore more than the budgeted amount for 2010-11.
 

OMC REVENUE LOSS    (In Rs cr)
	2009-10	2010-11*
Petrol	5,151	2,500
Diesel	9,279	27,000
LPG	14,257	20,000
Kerosene	17,364	20,000
Total	46,051	69,500
On sale of auto and cooking fuels *Estimated

Senior officials said Finance Minister Pranab Mukherjee cancelled Thursday’s meeting of an empowered group of ministers on fuel prices. He instead held a meeting with Petroleum Secretary S Sundareshan, who briefed him on the mounting burden of oil marketing companies (OMCs).
 

GOVT SUBSIDY              (In Rs cr)
	2009-10	2010-11
Cash	14,954	17,308**
Bonds	10,306	—
**With govt sharing more than one-third burden, the total subsidy bill is estimated to cross Rs 40,000 cr

Mukherjee had earlier written to Petroleum Minister Murli Deora, assuring him that the government would share one third of the under-recoveries incurred by OMCs in selling diesel, LPG and kerosene below the market rates. “The ministry of finance’s share in the subsidy burden will be more than one third. Upstream companies (ONGC, Oil India and GAIL) will not share more than 33 per cent of the under-recovery,” Sundareshan told reporters on Thursday.

Though the additional amount would show in the government’s current year account, the three OMCs had accounted for it in their books last year. Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are now estimated to incur a revenue loss of Rs 70,000 crore, if the benchmark Indian basket of crude oil continues to rule at around $90 a barrel in the January-March quarter.

“There is a complete understanding between the ministries of finance and petroleum, as in the past, that the under-recoveries of OMCs will be adequately and fully compensated by upstream companies and the government, and a small portion, if possible by OMCs,” said the petroleum secretary.

High oil prices have also thrown a spanner in the government’s disinvestment roadmap. With Indian Oil Corporation’s issue already postponed, ONGC’s follow-on issue is now crucial for the Centre’s Rs 40,000-crore disinvestment target for 2010-11.

Disinvestment compulsions will prevent the government from asking upstream companies to take on a heavier burden, since any increase in their share would have a negative impact on ONGC valuations.

Upstream oil & gas producing companies are asked to share the subsidy burden of OMCs, since an increase in global prices improves their returns. The crude oil spike has led to an increase of about 8 per cent in gross realisation during the third quarter ending December, compared with the second quarter. These companies may improve their net realisation (post-subsidy) by close to $2 a barrel, if their subsidy burden remains at one third.