The steep fall in crude prices has put ONGC in a curious situation. For the first time, India's major oil producer finds that the discount it has to give on its produce is higher than the actual oil price.

While ONGC has to give a discount of $56 a barrel to public sector buyers as part of the government’s subsidy-sharing mechanism, international crude oil prices are $6-7/barrel below that level.

This is for the first time that ONGC is facing such a situation, a senior official of the company said. The Centre needs to correct this anomaly at the earliest if it wants ONGC’s disinvestment to succeed, the official added.

The Centre proposes to dilute its stake in the public sector oil explorer by a further 5 per cent, or around 42.77 crore shares, this month.

However, ONGC and the Ministry for Petroleum & Natural Gas are yet to hear from the Finance Ministry on the date for stake dilution. Both ONGC and the nodal Ministry expect the subsidy issue to be resolved before the proposed stake sale.

As per the subsidy-sharing programme, upstream companies such as ONGC and Oil India offer discounts to their counterparts in the refining-cum-retailing business. ONGC bears a sizeable part of the burden — almost half of the under-recoveries of oil marketing companies — hurting its profitability.

“Whatever the market price of crude oil, ONGC has to give a discount of $56/barrel. With crude falling to $50/barrel and expected to decline further, there is no room for the company to make any money,” another official said.

Ad hoc mechanism

The official added that the subsidy-sharing mechanism is ad hoc, where the upstream companies are informed by the end of a quarter what quantum of the subsidy they have to shoulder. “We expect that by January-end or February first week the Government will correct this anomaly when deciding on the quantum,” the official said.

For the first half of the current fiscal, ONGC has already shouldered a subsidy of about ₹26,841 crore, and the payout for the remaining period will depend on what the Centre decides. ONGC’s contribution was ₹49,421 crore in 2012-13, which rose to ₹56,384 crore in 2013-14.

At ONGC disinvestment road-shows, potential investors had raised concerns about the impact of the ad hoc subsidy-sharing mechanism on the oil major’s balance-sheet.

Countering the criticism that as ONGC’s production cost is low it may not be cash-starved, a company official said: “Production cost without considering returns on investments and corporate tax in 2013-14 was $36 a barrel. This fiscal, it is expected to be a dollar or so more. Seeing the prevailing crude price scene, the company is left with no scope for making margins.”