ONGC subsidy-sharing may be capped at a third of fuel losses

Oil and Natural Gas Corporation's subsidy-sharing is likely to be capped at a third of its refining counterparts' total fuel losses.

This issue has constantly irked ONGC's potential investors and the Centre is likely to address it before the company's follow-on public offer scheduled in the coming months.

Keeping refiners in the black

As crude prices continue to be volatile, it has been a tough task for the think-tank in Delhi to evolve a permanent compensation formula to the trio of IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.

Over the years, the easy way out was to get the upstream companies (ONGC, Oil India and Gail India) to share the burden by way of discounts on crude and petro-products. This was not an issue so long as global crude prices were under $50 a barrel. However, the script went horribly wrong in 2008-09 when crude touched an all-time high of $147 a bbl.

Eventually, ONGC and its upstream allies ended up being poorer by Rs 33,000 crore that fiscal because it was the only way to keep the refiners in the black. It was a year when fuel losses (as a result of price subsidies on petrol, diesel, cooking gas and kerosene) touched Rs 103,000 crore.

The following year (2009-10) was relatively a dream run since crude prices stayed in check and the oil companies had little reason to complain. It also prompted the Centre to consider a new support sharing mechanism where ONGC would only meet petrol and diesel losses instead of the entire fuel basket.

Crude oil surge

Nobody expected such a dramatic turnaround of events in 2010-11 as crude showed its ugly side again and the all-too familiar spectre of fuel losses began to haunt the refiners. Even while the Centre declared during the year that the upstream companies would only bear a third of the losses, their actual outgo ended up being closer to 39 per cent.

It is getting increasingly clear that the Finance Ministry is in no mood to compensate the refiners on the levels of 2008-09 even though they are not to blame for the mess. This fiscal has already seen price hikes in diesel, cooking gas and kerosene accompanied by duty cuts so that the overall fuel losses are kept in check.

The final solution

In this backdrop, the Centre would be in better position to fix a permanent compensation formula where ONGC, GAIL and Oil India would not fork out over a third of the fuel losses. The Finance Ministry will continue to do its bit as also the refiners, which can absorb up to 10 per cent.

Should this happen, investors of ONGC's FPO would be a happy lot.

Not everyone is convinced, though, that this will be a permanent solution. In the first place, even after the price hikes and duty adjustments, the losses on kerosene, diesel and cooking gas continue to be worryingly high. Two, there is no telling where global crude prices could head for the rest of the fiscal or even thereafter.

COMMENT NOW