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The Finance Ministry has extended a government cash assistance of Rs 6,000 crores to oil. This is for the fiscal year 2014-15.
According to official sources, there is cash assistance given for petrol and diesel as they stand deregulated. The assistance will help the companies to boost their financial health as they are required to come up with their results by November 15, said sources.
The Petroleum Ministry has earlier proposed to split the country's total fuel subsidies equally between the government and the two state-owned upstream oil and gas producers, Oil and Natural Gas Corporation and Oil India Limited. They currently share the fuel subsidy burden with the government on an ad-hoc basis as decided by the government. As a result, state-run ONGC and Oil India could see their oil subsidy burden reducing by a steep 40% to Rs 39,200 crores in the current financial year.
ONGC and OIL sell their crude oil to downstream companies at a discount (their share of the fuel subsidies) because the latter sell refined-oil products, primarily kerosene and liquefied petroleum gas after deregulation of diesel and petrol at government-set prices, which are lower than their production costs. The government also takes a share of the fuel subsidies by giving cash compensation to the downstream companies.
The Finance Ministry has estimated a far lower subsidy burden on account of oil owing to falling crude prices for the year 2014-15 at around Rs 80,000 crores. Officials explained the crude price fall may have been more accentuated in the last few days but it has been consistently coming down for last 7-8 months notwithstanding the occasional spikes seen in the month of June 2014.
According to market sources, with every one dollar fall in crude oil prices, India's import bill drops by about Rs 3,700 crore. After rising sharply in mid-June on fears of supply disruption due to the violence in Iraq, crude oil has been on a slippery slope. From nearly $115 a barrel in mid-June, the price of Brent has been continuously falling and today touched nearly $90 a barrel, a 27-month low.
The weakness in global crude oil prices is primarily due to rising global supplies from countries such as the US and Libya, and subdued demand due to economic weakness in China and Europe. Lower crude oil price along with a fairly stable rupee has resulted in the Indian crude oil basket costing much less now (about Rs 5,800 a barrel) than in June (more than Rs. 6,500 a barrel).
Moreover sources explained that low crude oil also means lesser under-recoveries to be incurred by the oil marketing companies due to selling fuels – diesel, LPG and kerosene - below cost.
Combined with the monthly 50 paise hikes, lower crude oil prices have wiped out the under-recoveries on diesel – the biggest contributor to the notional losses in the past. Reportedly, the oil companies are now having an over-recovery on diesel, earning Rs 1.9 a litre more than intended.
With under-recoveries on diesel not a worry (at least for now), and that on LPG and kerosene also set to fall with lower crude oil price, the total under-recoveries of the oil marketing companies are set to fall to under Rs 90,000 crores in 2014-15 from nearly Rs 1,40,000 crores last fiscal year.
