The Hindu Business Line : ONGC, OIL told not to subsidise crude

New Delhi, Dec. 18 The Government has told ONGC and Oil India Ltd not to extend any discounts with effect from last week of November to public sector oil marketing companies (OMCs) – Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation – on the sale of crude oil.

Official sources told Business Line that “the upstream companies have been informed that till further advice with effect from the November fourth week the discounts extended to OMCs can be discontinued provisionally.”

After the decline in the global crude prices that began in August, the upstream companies had approached the Government to discontinue the existing subsidy sharing mechanism, which required these companies to partially offset the revenue loss incurred by the OMCs. This was because the crude prices have come down to the levels lower than the earlier subsidised price.

The upstream companies extend discounts to the OMCs on crude oil and petroleum products sold to the retailers by them. Till the third week of November, the upstream companies have already shouldered a subsidy burden of Rs 30,200 crore, sources said. For the full fiscal 2007-08 the upstream sharing stood at Rs 25,708 crore.

Besides, the sharp decline in crude prices has also resulted in the under-recoveries incurred by OMCs coming down significantly. When crude was at $147, the estimated ‘under-recovery’ for the current fiscal was to be over Rs 2,00,000 crore. This is now projected at around Rs 1,10,000 crore.

The OMCs are now earning positive margins on sale of petrol and diesel. However, they continue to incur under-recovery on sale of LPG and kerosene.

Sources said that when the under-recovery was estimated to be over Rs 2,00,000 crore, the upstream contribution was projected to be Rs 45,000 crore for this fiscal. Now with the softening of the crude, the target is to restrict it to Rs 30,000 crore. “If this be the case, the upstream have already met the requirement,” the sources added.

Due to the excessive subsidy burden, ONGC had reported a 5.7 per cent dip in its net profit for the second quarter of FY 09. The subsidy discount to cover the under-recoveries by the OMCs went up over two-fold (233.3 per cent) for ONGC during the quarter to Rs 12,663 crore (Rs 3,799 crore).

The Government now expects to have a fresh formula in place by middle of January to deal with the issue of under-recoveries. At present, to insulate the consumers from the volatile international oil prices, the Government has been following what it calls equitable burden-sharing principles under which major portion is borne by the Government (oil bonds), upstream companies and OMCs.

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