Oil PSUs squeezed mercilessly

Despite all-out efforts to build indigenous capabilities in the energy sector for decades, India remains dependent on imports to the extent of 80 per cent for its oil needs.

The Oil & Natural Gas Corporation — a central public sector maharatna company — currently produces about 30 million tonnes of crude oil or 80 per cent of domestic output. It has plans to invest Rs 11,00,000 crore ($177 billion) in oil exploration till 2030. That is expected to yield additional production of 60 million tonnes and should help in lowering import.

Financing this gargantuan investment poses a huge challenge. All along, the Government had been goading profit-making central PSUs to fund their capital expenditure from ‘internal’ resources.

Essentially, ‘internal’ resources are profits retained by the undertaking after paying taxes and meeting other obligations such as dividend to shareholders (in the case of ONGC, mostly to Government).

Given its low cost of production and much higher price realisation tagged to the international price of crude oil, ONGC has all along been placed in a vantage position. It has been generating huge surpluses year after year.

Unfortunately, the Government has appropriated most of it by forcing it to sell crude to oil marketing PSUs, namely IOC, BPC and HPC, at a “huge discount”.

Steady depletion

During the last decade, ONGC has given a cumulative discount of Rs 2,16,000 crore. Last year alone, it was Rs 49,000 crore. This has resulted in depletion in cash balances to Rs 6,000 crore as on March 31, 2013.

By the end of the current year, even this will disappear This is because against planned capital expenditure of Rs 35,000 crore, internal generation of ONGC would be Rs 27,000-28,000 crore.

The situation is worsening by the day. At present, with crude price of around $103 per barrel and discount $63 per barrel, the net-back of $40 per barrel barely covers cost.

ONGC has submitted a proposal to the Ministry of Petroleum & Natural Gas under which discount should be so set as to leave a minimum of US$ 65 per barrel with it

Why should it be forced to give a discount in the first place? Why should it not be allowed to charge full import parity-based price? Why should it be treated unfairly vis-à-vis its counterpart in the private sector, namely Cairns India?

Naming the culprit

The culprit is under-recoveries (URs) that oil marketing PSUs incur on sale of diesel, kerosene and LPG at prices below their cost/import price. Between 2009-10 and 2012-13, these went up from Rs 46,000 crore to Rs 1,61,000 crore, a three-and-a-half-fold jump.

If entire URs were to be funded from the Government’s budget as subsidies, that would inflate an already bloated fiscal deficit. Therefore, it chose the easy option of asking upstream central PSUs, namely ONGC, OIL and GAIL to share the burden.

In 2012-13, they were made to shell out Rs 60,000 crore or 37 per cent of URs. The contribution of ONGC alone was 30 per cent. In the first quarter of the current fiscal, it absorbed Rs 12,300 crore which was 50 per cent of URs at around Rs 25,500 crore.

With a view to reducing URs, Government took some steps in January: it hiked the price of diesel by Re 0.45 a litre every month, eliminated subsidy on supplies to bulk users, and put a cap on LPG subsidy.

That led to lower URs at Rs 25,500 crore during April-June, 2013, down from Rs 45,000 crore during April-June, 2012.

Yet, the discount given by upstream PSUs remained unaltered at Rs 15,000 crore! ONGC’s share went up from 27 per cent to 50 per cent.

Thanks to nearly 15 per cent depreciation of the rupee during the current fiscal and some hardening of crude price, URs are back on a rising trajectory. Diesel, after touching a low of Rs 4 a litre in May, has already crossed Rs 10 per litre.

For the current fiscal, URs are expected to be Rs 1,80,000 crore. Rulings by the Kerala and Tamil Nadu High Court directing oil PSUs to sell diesel to bulk consumers at the same rate as for retail will further add to URs (Petroleum Minister Veerappa Moily does not intend to contest).

Mind the gap

Against this, budget allocation for oil subsidies is only Rs 65,000 crore. Given the Finance Minister’s red lines on fiscal deficit (4.8 per cent target must not be breached) and the fact that 60 per cent of this was already reached in the first four months, the Government will not provide more funds.

We are thus staring at an uncovered gap of Rs 1,15,000 crore (Rs 1,80,000 crore minus Rs 65,000 crore). That will prompt the Government to milk upstream PSUs — mainly ONGC — on a scale much greater than even last year.

No wonder, its internal generation could turn ‘negative’.

Through its actions, the Government may have achieved fiscal consolidation. It may also give comfort to its political constituency by not raising diesel and LPG prices to the extent required. But, the collateral damage is unimaginable.

To achieve the production target, ONGC needs to invest Rs 11,00,000 crore till 2030. That translates to around Rs 65,000 crore annually for 17 years. Where will this money come from? If ONGC had not given away Rs 2,16,000 crore, its retention (net of taxes and other liabilities) since 2003-04 would be about Rs 1,25,000 crore. These resources could be leveraged to support the required investment.

Proliferating URs on petroleum products — all due to the zeal of the ruling dispensation to keep their prices low — have kept IOC, BPC and HPC on edge. They are heavily leveraged and groaning under the high interest cost.

Oil products were decontrolled in 2002. The Government had committed to give subsidies, if any, directly from the budget. Yet, these basics were flouted. Price controls were back (through the back door) and oil companies sucked (apart from taxpayers) to pay for URs.

The Government should remove price controls on all POL products and give subsidy directly to the poor. It must not meddle with oil PSUs. And, it should allow the private sector in oil marketing to foster competition. There is no escaping these crucial reforms.

(The author is a policy analyst.)

COMMENT NOW