Subsidy burden 20% higher for upstream oil firms in Q3

The government’s upstream oil companies, Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), will have to fork out 20 per cent more subsidy in the third quarter of 2010-11 to compensate oil marketing companies (OMCs) for their losses on fuel.

ONGC will have to bear a subsidy of Rs 4,222 crore, said a company official. This is about 20 per cent higher compared to the Rs 3,497 crore it paid in the corresponding quarter of the previous year. Similarly, OIL will be paying Rs 558 crore as subsidy for the third quarter ended December 31, about 19 per cent higher than the Rs 467.6 crore in the same quarter last year.

Upstream companies such as ONGC, OIL and GAIL have to provide discounts on crude oil and product sales to public sector OMCs, under the government’s mechanism to compensate the retailers for selling automobile and cooking fuels below the market price. The discount is capped at a third of the total revenue loss. Accordingly, for the Rs 15,750 crore of loss incurred by the OMCs — Indian Oil, Bharat Petroleum and Hindustan Petroleum — the upstream companies will be bearing Rs 5,198 crore for the third quarter. GAIL has incurred a subsidy burden of Rs 418 crore for the quarter.

The OMCs, which purchase crude oil at market rates, are required to sell diesel, kerosene and liquefied petroleum gas (LPG) at government-set prices, resulting in losses. These losses are usually compensated by a cash subsidy from the government and discounts on crude purchase from ONGC and OIL.
 

OIL WOES
Company	Subsidy burden
	Q3*  2009-10	Q3* 2010-11	% chg
ONGC	3,497.00	4,222.00	20.73
OIL	467.62	558.00	19.32
GAIL	455.00	418.00	-8.13
* Figures in Rs  crore

The price of diesel, kerosene and LPG, that together account for 60 per cent of petroleum products’ consumption, has not been increased since June 25. Currently, the OMCs are incurring under-recovery (revenue loss) of Rs 6.80 per litre on diesel, Rs 18.66 per litre on kerosene and Rs 366 per cylinder on domestic LPG. Petrol prices were decontrolled with effect from June 26, 2010, and the OMCs have periodically raised the price to pass on the loss. They are, however, likely to declare a loss in the quarter, as the government is yet to compensate the under-recoveries.

“Q3 will see net loss if compensation is not there,” IOC Chairman B M Bansal said today. The company lost about Rs 8,500 crore on selling diesel, domestic LPG and kerosene below cost in the quarter. A third of this will be made up by upstream companies, leaving IOC with an uncompensated loss of Rs 5,600 crore.