OMCs under-recoveries seen declining to Rs 56,000 cr next fiscal

Modified DBT in LPG scheme to aid upstream firms' burden sharing to Rs 28,000 cr

Gross under-recoveries of Oil Marketing Companies (OMCs) on subsidized sales of petroleum products are seen declining to Rs 80,000 crore in the current fiscal and Rs 56,000 crore by the next financial year, based on an average Indian basket crude oil price of $70 per barrel and the Rupee-Dollar exchange rate of 63. 

Also, the subsidy burden on public sector upstream companies is seen falling to Rs 28,000 crore in the next fiscal. The fall in gross under-recoveries would be further aided by the implementation of the modified DBT in LPG scheme in 54 districts from November 15 and rest of India from January 1. Under the scheme, OMCs would sell LPG at market price while subsidy would be transferred directly into consumers account.

However, there is lack of clarity on the sharing of the LPG subsidies to be borne under modified DBTL. The fall in subsidy burden on PSU upstream companies is crucial for energy security of the country considering the capital expenditure and overseas acquisition plans of upstream companies, which may require significant cash outgo, according to research and ratings agency ICRA.
 

Analysts had earlier projected the gross under-recoveries of PSU Oil OMCs to decrease to around Rs 1 lakh crore in the current financial year ending March 2015, down from Rs 139,000 crore last fiscal considering average Indian basket crude oil price of $ 108 per barrel and Ruppe-Dollar rate of 59.5. Now, the fall in under-recoveries is likely be sharper to around Rs 80,000 crore for FY15.

“The fall in under-recoveries in the first half of the current financial year to Rs 51,100 crore from Rs 60,900 crore the first half of last financial year has not helped the upstream companies as the government of Indian has retained large part of benefits of lower gross under-recoveries,” said K Ravichandran, Senior Vice President and co-head of corporate ratings at ICRA.  

The burden on PSU upstream companies, Oil and Natural Gas Corp (ONGC) and Oil India (OIL) continued to be fixed at around $56 per barrel of crude production. The high subsidy burden with lower gross realization impacted the profitability of upstream companies in second quarter. 

Ravichandran added that unless the sharing formula is revised, the softened crude oil prices would significantly impact the net realization and profitability of ONGC and OIL since the third quarter. “We expect the government of India to revise the sharing formula and the discount burden to decrease materially in second half of current financial year so as to help the PSU upstream companies to achieve reasonable profits,” he said. 

Crude oil prices have declined to around $60 per barrel off late after being range-bound at $100-115 over the past 2-3 years. According to Ravichandran, crude prices are expected to remain at such subdued levels in the near term because of rising supplies from US and Libya; weakening of demand in China, Eurozone and Japan; the decision of Saudi Arabia to defend market share and paring of speculative positions in commodity exchanges. 

The bearish scenario of oil prices could be altered in case there is a change in key sensitivities in the oil market – change in stance of OPEC towards production level, major geo-political events and cut back in supplies by high cost shale oil players. The lower level of crude oil prices, if sustained, is likely to adversely impact profits of domestic oil producers.