The Hindu Business Line : Govt move to compensate oil cos not unexpected

In the politically volatile situation with talks doing the rounds about the probability of the ruling coalition advancing the next general election ahead of the schedule, the triple decision of the Union Cabinet on Thursday to boost the drooping spirit of public sector oil marketing companies (OMCs) and to help compensate them against continuous financial bleeding has not come quite unexpected.

Oil industry analysts and market savants say these decisions were primarily designed to desist from undertaking the unpalatable upward revision in retail prices of these crude-based products at a time when there is no let up in the relentless rise in global crude prices.

No doubt, the UPA Government with its remit of sparing the aam adhmi from the adverse impact of escalating prices of essential items decided in June 2004 its policy of containing the burden of increase in international prices on consumers of sensitive petroleum products.

It was decided that the burden should be equitably shared by consumers, the Government and the oil companies.

Accordingly, from 2003-04 onwards, the Government introduced the upstream subsidy-sharing mechanism, under which the upstream (oil/gas) companies might share about a portion of the total under-recoveries of OMCs.

subsidy schemes

Even as nobody would fault the Government for extending extant subsidy schemes for a span of three more years from April 1, though there is a need to make the domestic cooking gas price to cover cost of production/delivery, the issue of oil bond by the Government to bear the under-recoveries of OMCs has also been accepted with the Finance Ministry plausibly demurring to this on grounds of fiscal prudence.

This leaves the third option of co-opting the upstream companies to share a part of the total under-recoveries of OMCs.

As it is the national oil company, the Oil and Natural Gas Corporation (ONGC) has sought review of the subsidy norms due to adverse repercussion of rupee appreciation on ONGC revenue and concerns of various stakeholders for evolving a suitable mechanism by which ONGC is able to retain a reasonable portion of the spurt in crude price for funding its escalating costs of development projects.

It needs to be noted that in the past two decades, ONGC has found 3,990 million barrels of oils and oil equivalent gas (MMboe) (O+OEG) of recoverable reserves equivalent to eight ‘major’ discoveries within and around discovered fields. The corporation has not made a single major discovery as large as 500 MMboe of recoverable reserves.

Interestingly, ONGC was awarded 47 blocks with operatorship in New Exploration Licensing Policy (NELP) rounds one to four. ONGC has reported eight oil/gas discoveries in 40 drilled wells as on July 2007, with the success ratio of just 20 per cent.

Considering the fact that the ONGC and OIL pay a cess on their crude for the development of the oil sector and out of Rs 57,000 crore gleaned from the cess so far only less than two per cent has been deployed for the industry’s development, several committees of Parliament have questioned this approach in the past. It is time that this cess stood withdrawn so that the corporation gets a relief of Rs 5,500 crore to spare outlays for exploratory work including for enhanced/improved recovery techniques to extract extra oil from the offshore.

In the monsoon session of Parliament, the Minister of State for Petroleum and Natural Gas, Mr Dinsha Patel, said in a written answer in the Lok Sabha that OMCs such as IOC, HPCL and BPCL had benefited due to the strengthening of the rupee vis-À-vis dollar as they import crude oil for refining. In fact, the exchange variation gain net of exchange variation on crude liabilities for IOC during the first quarter of 2007-08 alone was Rs 726 crore.

No wonder, IOC has been in the top ten advance tax payers’ league this year as it disbursed Rs 686.59 crore up to September 2007 instalment.

Even as it is losing in under-recoveries it is gaining in currency appreciation, whereas upstream companies such as ONGC, OIL and GAIL have not been so well placed.

It is time that the authorities provided the requisite comfort to upstream companies for their development expenditure so that the country’s 73 per cent dependence on imported oil is somewhat minimised instead of robbing Peter to pay Paul!

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