ONGC wants fuel subsidy issue settled before Govt’s stake sale

The government plans to sell 42.77 crore shares, or five per cent of its stake in ONGC worth Rs 17,400 crore at current prices, this fiscal. The first disinvestment by the new government is part of a plan to narrow budget deficit to the lowest in seven years.

Commenting on the stake sale, ONGC wrote to the Oil Ministry saying any disinvestment at this stage may not realise the true potential/value of the company shares.

ONGC said its payout to help fuel retailers sell diesel, domestic cooking gas (LPG) and kerosene at subsidised rates to consumers has been steadily rising — from Rs 44,466 crore in 2011-12 to Rs 56,384 crore in 2013-14.

In 2013-14, its net realisation after subsidy payout was a mere $41 per barrel of oil. Out of this, the company has to meet cost of production, which is $42-44 per barrel as well as pay statutory levies like cess, royalty and VAT.

‘ONGC has been requesting ministry to review the existing sharing mechanism so as to ensure a minimum realisation price of $65 per barrel to generate sufficient cash for domestic exploration and international acquisitions,’ it wrote.

The government asks upstream firms like ONGC to make good a part of losses retailers make on selling diesel and cooking fuel below cost. The share of upstream firms has been steadily rising over the past years.

While the subsidy sharing has adversely impacted its bottomline, the non-transparent mechanism of subsidy sharing has become a corporate governance issue, ONGC said.

‘ONGC's independent directors have been expressing their concerns on the existing mechanism. 

Investors have also expressed their concern on the current mechanism. As per them, the current mechanism is uncertain and due to which they are not able to properly value the shares of ONGC,’ it wrote. It said the government had on 10 January notified a new pricing guideline for natural gas as the current rate of $4.2 per million British thermal unit is not sufficient to incentivise companies for investment in gas business.

The guidelines, which would have doubled gas price, were to be effective from 1 April but have been put on hold by the new government.

‘A sustainable gas pricing policy is required to be spelt out by the government of India for enhancing investment in the gas business,’ ONGC said.