Why Modi govt should pause before divesting ONGC

State owned Oil and Natural Gas Corporation (ONGC) is playing the role of a spoiler in the finance minister’s divestment plan. The government plans to sell five per cent stake in the company which at current prices can fetch them Rs 17,400 crore.

 

The company in a letter to the oil ministry has raised five issues, which it believes need to be resolved before divestment. ONGC feels that resolving these issues will help the government in getting a better valuation for its stake.

 

The company believes that there should be a resolution on subsidy burden sharing with oil marketing companies (OMCs), non-transparent method in computing it, high cost of production in oil fields, deferment of the decision to double gas prices and the ongoing review of the New Exploration and Licensing Policy(NELP). Apart from deferring of gas prices none of the other points raised by the company is new. Even in earlier divestments by the government in ONGC, these issues were present.

 

Though ONGC is not objecting to divestment, it has raised pertinent points. More importantly it is raising the points that will not only benefit the company but also the government. 

 

Despite oil prices staying above $100 per barrel in the international market, ONGC sells to oil marketing companies at less than half the price as it has to share the subsidy burden of artificially keeping prices of kerosene, diesel and LPG low. In 2013-14, ONGC’s net retention was only $41 per barrel. 

 

What the company is trying to tell the government is to reduce the subsidy on these fuels which would result in the company getting higher prices for its crude oil. But the queries raised by ONGC give rise to some bigger questions that need to be answered. 

 

Along with ONGC, oil marketing companies are victims to the skewed policy of the government in the oil sector. Public sector companies are made to sell subsidised products in the market while private sector ones are allowed to export the same products at higher prices in the global market. Public sector companies have to wait (at times for nearly a year) for the government to pay them back their share of the subsidised amount, while there is no such issue for the private sector players. 

 

Capacity expansion of refining sector in the country best displays this anomaly. In 1998, when almost all the capacity in the country was owned by public sector companies, capacity stood at 62 million tonnes per annum. Presently, the country has 215 million tonnes of refinery capacity out of which 120 million tonnes is with the public sector companies, joint ventures between public and private sector players account for 15 million tonnes while private sector players now have 80 million tonnes capacity on the ground. 

 

Looking at it differently, public sector players were able to add only 58 million tonnes in the past 16 years while private players, because of their strong financials and easier access to loans (on account of their strong balance sheet) have had a faster growth rate. Lack of a level playing field and a clear bias toward private sector players is the only reason for such lopsided growth. 

 

ONGC is correct in bringing to the oil ministry’s notice that by selling its stake with all the handicaps that the company and the sector is facing, government will be getting a lower valuation. By rectifying the issues faced by the sector, government can not only earn more by selling its stake in ONGC but also make money by selling stakes in other oil sector PSUs.