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Upstream oil firms gain from retail price rises

Ajay Modi  |  New Delhi 

Fuel price rise in June brings down subsidy burden by 45%.

In what will enhance the financial performance of upstream oil companies, the subsidy burden on Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL) and GAIL Ltd has decreased by 45 per cent in a single quarter thanks to the June fuel price rises.

The government uses a one-third burden sharing formula. In the first quarter of 2010-11, the subsidy burden on ONGC and OIL was Rs 5,515 crore and Rs 730 crore, respectively. In the second quarter ended September 30, it is projected to dip sharply to Rs 3,019 crore and Rs 400 crore, respectively, on lower fuel losses of oil marketing (OMCs), said a government official. For GAIL, the burden is estimated to decline 22 per cent to Rs 347 crore.

The decline in the subsidy burden of these will reflect positively on their bottom line. All these are expected to declare their quarterly results towards the end of October. Both ONGC and OIL had reported lower profits in the first quarter, due to higher subsidy burden. For ONGC, the net profit was Rs 3,661 crore (compared to Rs 4,848 crore in the corresponding quarter of 2009-10). OIL’s net profit was Rs 501.1 crore (Rs 739.7 crore).

While the OMCs — Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum — purchase crude oil at internationally benchmarked prices, the sale price of products such as diesel, kerosene and LPG are not maintained in line with international prices. This causes a revenue loss for the companies. The OMCsCs’ revenue loss on the sale of these products during 2010-11 is now estimated to be about Rs 53,500 crore. Following the decontrol of petrol and increase in prices of diesel, kerosene and LPG on June 25, the revenue loss of OMCs has declined to Rs 11,300 crore in Q2 from Rs 20,000 crore in Q1.

Upstream companies such as ONGC, Oil India and GAIL (India) 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 auto and cooking fuels below the market price. The discount is capped at a third of the total revenue loss. Accordingly, the upstream companies including GAIL (India), had provided Rs 6,690 crore in the first quarter ending June. In the quarter ended September, the subsidy burden on upstream companies is estimated to be much lower, at Rs 3,766 crore.

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First Published: Mon, October 18 2010. 00:14 IST