Oil and Natural Gas Corp (ONGC) has warned its output growth and international acquisitions are under “serious threat” due to disproportionate rise in fuel subsidy burden.
Oil and gas producers like ONGC and Oil India make up for a part of losses fuel retailers incur on selling diesel and cooking fuel at government controlled rates. This subsidy payout is by way of discounts they offer on crude oil sold to them.
ONGC in a letter to the Oil Ministry said the net price realised after subsidy discounts has been falling.
As against a cost of production of $ 40 a barrel of oil (without considering return on investment), ONGC got a net price of $ 40.17 a barrel in Q1 of this fiscal.
“There has been significant reduction in ONGC’s net realised prices over the years i.e. from $ 54.72 a barrel in FY’12 to $ 47.85 a barrel in FY’13 and to $ 40.17 in Q1 FY’14,” it said.
Since 2004, the company has paid Rs 216,336 crore in fuel subsidy, but for which its net profit would have been higher by Rs 125,477 crore that is enough to buy properties producing 10-15 million tons of oil per annum.
“Due to increasing burden of subsidy sharing, profit after tax from crude oil from nominated blocks has already eroded by almost 50 per cent over the last three years,” it said adding if the trend continues entire oil production from nominated blocks (more than 80 percent of ONGC’s production) will become unprofitable.
ONGC said it needs a minimum price of $ 65 a barrel, without which the investments planned in redevelopment of old and ageing fields will not be commercially viable.
“We reiterate that owing to the current under-recovery sharing mechanism, ONGC’s endeavours to grow domestic hydrocarbon production as well as to enhance India’s energy security through international oil and gas equity are under serious threat,” it said.
Terming the present subsidy sharing mechanism as lop-sided, it said continuation of the existing system would hamper not only ONGC’s growth plan and its long term sustainability but also country’s interest.
“On the contrary, higher remunerative prices would not only improve ONGC’s ability to produce incremental/ additional oil from redevelopment of particularly logistically difficult fields/ marginal fields resulting into considerable savings in import bill as explained above but would also stimulate investment into exploration as well as acquisition efforts which would ultimately translate into long term energy security of the country,” it said.