Millennium Post

Govt may lower ONGC’s subsidy burden, adjust its cess payment

According to a new subsidy sharing formula, the payout of upstream oil producers like ONGC is to be reduced to the extent of Rs 4,500 per tonne oil development cess they pay to the government, sources privy to the development said.

The move to lessen the subsidy burden will give a flip to government's plan to sell 5 per cent stake in Oil and Natural Gas Corp (ONGC) to garner about Rs 17,000 crore.

The cess in current fiscal will total Rs 10,500 crore and after accounting for Rs 31,926 crore that upstream firms ONGC and Oil India (OIL) have already paid in fuel subsidy in first half, their payout in remainder of the current fiscal will be no more than Rs 8,000 crore. Upstream producers like Oil and Natural Gas Corp (ONGC) met nearly half of the revenue loss or under-recoveries that fuel retailers incurred on selling cooking fuel and diesel until recently at government controlled rates.
This dole, which was in the form of deep discounts on oil ONGC sold to refineries, had strained its balance sheet as its net realisation fell below the economic cost of oil.

Sources said subsidy burden on upstream oil companies has increased from Rs 32,000 crore or 30 per cent of the total under-recovery in 2008-09 to Rs 67,021 crore (48 per cent of the total under-recovery) in 2013-14.

In 2013-14, ONGC paid a record Rs 56,384 crore subsidy, which this fiscal is likely to come down to around Rs 32,000 crore.

Making a dent on their earnings, this has significantly constrained the capacity of these companies to increase their exploration efforts in difficult areas, thereby adversely affecting the country's domestic oil production.

The Comptroller and Auditor General of India (CAG) had in its report on pricing mechanism earlier this year stated that the combined effect of cess and discount had resulted in margin per barrel of crude from nomination blocks of ONGC being much lower than private sector fields.

The report had also pointed out that the uncertainty in the mechanism of funding under-recoveries would place public sector upstream companies at a relatively disadvantageous position.

Sources said the ministry wants the cess being collected by the government from the nominated fields of the public sector upstream oil companies be considered part of the subsidy burden share borne by ONGC and Oil India Ltd (OIL).

Thus the upstream share would reduce to the extent of cess being paid by them to the government.
With international oil prices slumping nearly 30 per cent, total under- recoveries this fiscal are estimated around Rs 79,000 crore.

Of this, about Rs 51,000 crore have already been accounted for in first half where ONGC paid Rs 26,841 crore subsidy, OIL Rs 4085 crore and GAIL Rs 1000 crore.

Sources said the ministry is of the view that unless sufficient funds are available for increased oil recovery and enhanced oil recovery schemes from the ageing oil fields, the country may notionally lose more than 70 million tonnes of indigenous crude oil production during next 10 years.

This may increase the import bill by Rs 3,33,000 crore.

However, if this crude is produced indigenously, it will cost only Rs 112,000 crore resulting in a substantial saving of Rs 221,000 crore. Also, new exploration in marginal/deep water/isolated field require huge investment and are viable for upstream PSUs only if sufficient revenue generation (covering the entire cost and reasonable profit) is available to upstream PSUs.

It is estimated that around 13 million tonnes of crude oil valued at Rs 60,400 crore would be expected from such fields.

Sources said the ministry feels that cess was to be deployed for development of oil sector. But only Rs 902.40 crore has been deployed for the purpose out of Rs 118,506.95 crore collected from 1974-75 to 2012-13.

It says that since the money collected on account of cess is not being transferred for the intended purpose, there is a need to make the cess levied under this act on the nominated fields of ONGC and OIL a part of the overall burden sharing mechanism from 2014-15 onwards.

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