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"Today, we are the golden goose and the oil marketing companies are bleeding. But tomorrow it may be our turn," ONGC Chairman and Managing Director Sudhir Vasudeva sums up the predicament of upstream companies in those words. He knows the tables could turn any moment for oil explorers such as ONGC which have to share the subsidy burden of fuel retailers to keep them afloat.
The reform measures initiated early this year to reduce retailers' under-recoveries have already started to crumble. A slew of measures-diesel decontrol, cap on the number of subsidised liquefied petroleum gas cylinders and phase-wise introduction of direct benefit transfer on LPG-was expected to lower under-recoveries from Rs 1,61,029 crore in 2012-13 to around Rs 80,000 crore this financial year. But petroleum ministry officials now contend under-recoveries are on full pelt towards a new high.
P K Goyal, director (finance), Indian Oil Corporation (IOC), says the company's under-recoveries are expected to reach Rs 68,000 crore from the sale of three products (diesel, LPG and kerosene) in 2013-14, while for the industry on the whole, it is likely to be around Rs 128,000 to Rs 150,000 crore.
Currently, the government and the upstream companies like ONGC, OIL and GAIL share the losses incurred by oil marketing companies from selling fuel at below market cost between them. In 2012-13, out of the total Rs 161,000 crore, more than Rs 60,000 crore was paid by upstream companies, while the rest was contributed by the government.
The rationale behind this sharing of the subsidy burden by the government and upstream companies is that ONGC has been making windfall gains since administered pricing mechanism was dismantled - starting from 2002.
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Loss of income
The numbers indeed are telling. ONGC's total subsidy outgo since 2003-04 till last financial year stands at Rs 216,336 crore, while its net profit has been negatively impacted over these years by Rs 125,477 crore. In 2012-13, the impact on profit after tax due to under-recovery was Rs 28,413 crore.
That's certainly worrisome for ONGC which has been shouldering the task of meeting the bulk of this shortfall since 2003-04. In 2012-13, the oil explorer's contribution skyrocketed to Rs 49,421 crore, an increase of 99 per cent from Rs 24,892 crore in 2010-11. Since 2003-04, its contribution has jumped a whopping 1,737 per cent.
Many say over-relying on the oil explorer could be detrimental for its future as it could drain ONGC of precious resources that could otherwise be used for exploration and acquisitions.
"If this Rs 216,336 crore had been with us, we could have used it for exploration and acquisition purposes," says A K Banerjee, director (finance), ONGC. "If someone wants to do a postmortem, out of a bank balance of about Rs 13,000 crore that we have, nearly Rs 7,000 crore is liability towards employees. If the cash balance of an energy major looking for acquisitions abroad is only Rs 6,000 crore, it is dangerous to add the under-recovery burden on that company."
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Former ONGC Chairman R S Sharma agrees. "The government should not consider ONGC as a cash cow. It should also take into account the interest of the investors in the company," he says.
A respite appears distant with the rupee hovering at around $60 against the dollar. According to petroleum ministry's estimates, for every rupee fall against the dollar, the under-recovery will increase by Rs 8,000 crore. At the same time, every dollar increase in crude oil prices would result in increase in under-recovery by Rs 4,000 crore. With Indian basket crude prices reaching $106, the losses for oil marketing companies are expected to go up further north.
"In about two months, the rupee has depreciated by Rs 4 versus the dollar. This has affected our expectations," says a senior official at an oil marketing company. The average crude oil price for April and May was at $ 101.58 and $ 101.14 per barrel, respectively. In July, it has risen to $ 107.97 per barrel.
Oil marketing companies, as of July, are incurring a combined daily under-recovery of about Rs 358 crore on the sale of diesel, kerosene and domestic LPG. This includes under-recovery of Rs 9.29 per litre on diesel, Rs 33.54 per litre on kerosene and Rs 412 per cylinder on domestic LPG. A minor under-recovery is also attached to petrol even though the fuel was decontrolled in June 2010.
However, a reduction in under-recoveries does not lower the share of subsidy of upstream companies. For instance, under-recoveries on diesel have fallen 64 per cent in the first quarter of the year compared to the same period last year due to decontrol. On kerosene too, the under-recovery shrank to Rs 6,507 crore in the first quarter as against Rs 7,274 crore in the first quarter last year. But the share of upstream majors has remained static.
"Last year, since crude oil prices were higher, the overall losses were in the range of Rs 45,000 crore during the first quarter. This year, it has come down to Rs 25,579 crore during the first quarter. However, the share of upstream majors still remains the same at around Rs 15,000 crore. There needs to be some formulae in deciding this," says Banerjee.
Echoing his words, T K Ananth Kumar, director (finance), Oil India, says, "The government should come out with a clear formula on subsidy sharing, rather than follow the current pattern. We have made our representation in this regard to the Kirit Parikh Committee (on pricing of petroleum products). However, the fall in rupee and the rise in crude prices are causing jittery nerves for us."
Increasing prices could be a way out of this mess, say analysts. "The decontrol measure of 50 paise per month introduced in January is not working out on diesel now. Every Rs 1 increase in diesel price would reduce under-recovery by Rs 10,000 crore. Hence, the government must go for a diesel price increase of at least Rs 2, as the subsidy on diesel is almost Rs 10 per litre now. An increase in kerosene and LPG prices is not possible as it is politically sensitive," says Debashish Mishra, senior director of Deloitte in India
Early this financial year, when the under-recovery on diesel had fallen to Rs 3 per litre, the finance ministry had come out with a statement saying that it expected the total subsidy to be around Rs 80,000 crore, out of which the government's provision would be Rs 20,000 crore and the sum provided by upstream companies would be Rs 60,000 crore, almost the same as last year. However, the changing rupee dynamics could upend that calculation. If that happens, as Sharma says, then not only the oil marketing companies but even ONGC will go on life support.
