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Govt may ask oil firms to share LPG, kerosene subsidy burden: India Ratings

India Ratings said ONGC's acquisition of Hindustan Petroleum Corp Ltd (HPCL) will be credit neutral for ratings of HPCL

Press Trust of India  |  New Delhi 

Field force at ONGC

As the crude oil prices rise, the government may ask upstream firms like to bear a part of the kerosene and LPG subsidies, and Research said on Thursday.

Producers Corp (ONGC) and Oil India Ltd as well as gas utility GAIL were in past asked to bear between one-third to half of the under-recovery fuel retailers incurred on selling LPG and kerosene below rate.

This subsidy sharing scheme ended last fiscal.

In a statement on its view on buying out HPCL, said given the sharp increase in international crude price, oil marketing may be required to bear a part of the under-recoveries.

This would be on the lines of past when the government capped the subsidy burden it was willing to share per kilogram and per litre on LPG and kerosene, respectively.

Any under-recovery over and above the level up to which the government can bear is to be borne by upstream and oil marketing companies, it said.

"Although there is no mathematical basis for deciding the share of the subsidy to be borne by upstream or oil marketing companies, upstream have historically shared the bulk of the remaining subsidy burden post the government share," it said.

said ONGC's acquisition of (HPCL) will be credit neutral for ratings of

ONGC, which is 68.94 per cent owned by the government, will acquire the government's 51.11 per cent stake in for Rs 36,915 crore.

"Thus, the government of India will indirectly own 35.23 per cent in HPCL," it said in a statement.

Despite the change in ownership, will continue to operate as a separate entity with a strong brand. Its strategic importance to the government is likely to remain intact, given the company's role as the State's extended arm for fuel policy implementation.

"The acquisition of HPCL is likely to result in additional borrowings for ONGC," India Ratings said, adding that the state-owned oil producer is likely to fund the acquisition by end-January 2018.

It could use one or more of the three sources for funding -- fresh debt, cash and cash equivalents, and monetisation of its stake in entities such as GAIL, Indian Oil Corp (IOC) and Petronet LNG Ltd.

The combined value of its stake in the three entities is about Rs 34,400 crore.

For HPCL, the acquisition may result in some synergies in crude oil procurement with Mangalore Refinery and Petrochemicals Ltd, which is 71.63 per cent owned by

HPCL, along with HPCL-Mittal Energy Ltd and MRPL, represented 15.3 per cent of India's total crude import volume of 249 million tonne.

Also, HPCL may be able to capitalise on ONGC's petrochemical expertise while expanding its footprint in the segment.

"The acquisition may result in the merger of MPRL with HPCL. This would be beneficial as it would allow the combined entity to leverage its purchasing power," India Ratings said.

The combined entity would be the third-largest refiner in India, with a refining capacity of 43.1 million tones, behind IOC's 80.8 million tonnes and Reliance Industries Ltd's 62 million tonnes.

India Ratings said HPCL may have to resort to additional borrowings in case it was to acquire ONGC's stake in MRPL for cash. ONGC's stake in MRPL is worth Rs 16,400 crore.

"Moreover, HPCL may consider a combination of share swap and cash payout, where ONGC would get additional stake in HPCL against its shareholding in MRPL," the rating agency said.

ONGC-HPCL deal is unlikely to alter government subsidies for kerosene and LPG.

First Published: Thu, January 25 2018. 18:50 IST
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