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Fortune favoured the victor. Just after the BJP stormed to power last May, the rout of crude oil began. This slashed under-recoveries of oil marketing companies (OMCs) arising from their selling diesel, LPG and kerosene at below production cost. To its credit, the Modi Government seized the moment — in October, it deregulated the pricing of diesel which accounted for a chunk of the under-recoveries. The move to plug leakages by transferring LPG subsidy to beneficiaries’ bank accounts was also well-timed.
The taming of the under-recoveries should have benefited not just the OMCs — Indian Oil, BPCL and HPCL — but also the public sector upstream companies, ONGC and Oil India, which bear a large portion of the burden by providing product discounts to the OMCs. But this was not to be. With crude oil price falling, it was critical that the subsidy burden on ONGC and Oil India be reduced.
The government’s vacillation cost these companies dearly. Their net realisations touched the nadir for the nine months to December 2014. Only in the March quarter did the government exempt the upstream companies from subsidy sharing. Better late than never! Also, the upstream companies may be spared the burden in 2015-16.
A much anticipated reform on which the Modi Government walked only half-way was the change in pricing of domestic gas. After dithering twice, the government came up with a pricing formula applicable from November.
But instead of a price close to market rates, the new formula saw the price of domestic gas rise from $4.2 a unit to $5.61 a unit. This was much lower than the $8.4 a unit under the Rangarajan Committee formula prescribed earlier.
The price applicable from April to September 2015 has further fallen to $5.01 a unit; this is nearly half the international gas price.
The S&P BSE Oil & Gas Index rallied 36 per cent from September 2013 to May 2014 on hopes that the government would go the whole hog on pricing reforms. The government has delivered to a large extent. But over the past year, the Oil & Gas Index is down around 17 per cent.
With the government finally providing relief to ONGC and Oil India on the subsidy front, these stocks may see better days ahead.
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