 "Crude awakening for ONGC, Oil India")
Till last week, state-owned Oil and Natural Gas Corporation (ONGC) and Oil India, two public sector units that are being readied for disinvestment, were among the few companies in India to rue falling crude oil prices. This drop, from an average of $111.89 a barrel in 2011-2012 to $84.15 for the year ended March 2015, has eaten into the margins and profits of these oil and gas producers.
Even so, they are likely to be completely happy with the kind of uptick in crude prices witnessed earlier this month. The prospect of crude prices nearing $70 a barrel - though the current average of $64.51 is well below last year's average - will certainly mean better margins for them. But higher oil prices would also pose the first real challenge in the sector for the National Democratic Alliance government since it came to power last year.
This is an issue of particular interest to the managements of ONGC and Oil India because they hope to enjoy some relief from the subsidy burden that, till recently (quarter ended March 2014-15), required them to share a proportion of under-recoveries (or revenue loss) of oil marketing companies from selling petroleum products to consumers at subsidised rates (private producers like the Vedanta subsidiary Cairn India do not have to do this).
"We have received a communication from the ministry of petroleum and natural gas detailing subsidy sharing formula for the first quarter of the current fiscal. If crude oil prices are below $60 per barrel, we are not liable to pay any amount for under-recoveries," said DK Sarraf, chairman and managing director, ONGC, at a press conference last week.
So far, the NDA has been able to reap the gains of falling crude oil prices by cutting retail prices of petrol and diesel, and taking these fuels outside the purview of administered pricing. But the big question is: Will it bite the bullet and pass on the burden of higher prices to consumers?
The government had reportedly assumed an average price of $70 a barrel for crude oil in the current year while assuming a budgetary outgo of Rs 30,000 crore. Of this, the LPG subsidy alone is Rs 22,000 crore, with kerosene accounting for the rest. Anything beyond $70 may lead to a higher subsidy requirement from the government.
Tinkering prices
Since January this year, petrol and diesel prices in Delhi have risen 8 per cent at Rs 66.29 a litre and Rs 52.28 respectively. And just as the entire benefit of falling prices was not passed on to consumers with the government increasing excise duty on petrol and diesel four times in quick succession between November 2014 and January 2015, it is likely that the entire increase in crude oil prices will not be passed on either. Instead, the government may lower excise - it has the leeway to do so with duties at Rs 7.75 per litre on petrol and Rs 6.50 for diesel.
The challenge, nonetheless, will be two-fold - the subsidy provided for the current year could increase and coupled with excise duty cut could impair the government's fiscal health. Which means that the decision not to charge upstream companies any subsidy may well be up for review.
In other words, Oil India and ONGC will see the dream run ending even before it started to come true. For ONGC, a barrel of crude oil could have got $106.72 last year but the compulsion of bearing a subsidy of $65.75 a barrel, left it with a net realisation of just $40.97. The subsidy burden on the upstream companies-ONGC, Oil India and GAIL (India) together-has soared from Rs 14,400 crore in 2009-10 to Rs 67,021 crore in 2013-14 but lower prices and no burden sharing in the fourth quarter may bring down their burden to around Rs 45,000 crore in 2014-15.
The government is working on a formula that will give upstream companies immunity from subsidy sharing by way of discounts on crude and refined fuels if global oil prices average up to $60 a barrel in a quarter. For prices beyond $60, the companies will have to give a discount of 85 per cent of the incremental oil prices and this discount will rise to 90 per cent for beyond $100 a barrel. That explains why moderate crude prices are critical for the government, both to keep the oil subsidy under control and to enhance the valuations of its upstream companies as they get ready for disinvestment.
Even so, they are likely to be completely happy with the kind of uptick in crude prices witnessed earlier this month. The prospect of crude prices nearing $70 a barrel - though the current average of $64.51 is well below last year's average - will certainly mean better margins for them. But higher oil prices would also pose the first real challenge in the sector for the National Democratic Alliance government since it came to power last year.
This is an issue of particular interest to the managements of ONGC and Oil India because they hope to enjoy some relief from the subsidy burden that, till recently (quarter ended March 2014-15), required them to share a proportion of under-recoveries (or revenue loss) of oil marketing companies from selling petroleum products to consumers at subsidised rates (private producers like the Vedanta subsidiary Cairn India do not have to do this).
"We have received a communication from the ministry of petroleum and natural gas detailing subsidy sharing formula for the first quarter of the current fiscal. If crude oil prices are below $60 per barrel, we are not liable to pay any amount for under-recoveries," said DK Sarraf, chairman and managing director, ONGC, at a press conference last week.
So far, the NDA has been able to reap the gains of falling crude oil prices by cutting retail prices of petrol and diesel, and taking these fuels outside the purview of administered pricing. But the big question is: Will it bite the bullet and pass on the burden of higher prices to consumers?
The government had reportedly assumed an average price of $70 a barrel for crude oil in the current year while assuming a budgetary outgo of Rs 30,000 crore. Of this, the LPG subsidy alone is Rs 22,000 crore, with kerosene accounting for the rest. Anything beyond $70 may lead to a higher subsidy requirement from the government.
Tinkering prices
Since January this year, petrol and diesel prices in Delhi have risen 8 per cent at Rs 66.29 a litre and Rs 52.28 respectively. And just as the entire benefit of falling prices was not passed on to consumers with the government increasing excise duty on petrol and diesel four times in quick succession between November 2014 and January 2015, it is likely that the entire increase in crude oil prices will not be passed on either. Instead, the government may lower excise - it has the leeway to do so with duties at Rs 7.75 per litre on petrol and Rs 6.50 for diesel.
The challenge, nonetheless, will be two-fold - the subsidy provided for the current year could increase and coupled with excise duty cut could impair the government's fiscal health. Which means that the decision not to charge upstream companies any subsidy may well be up for review.
In other words, Oil India and ONGC will see the dream run ending even before it started to come true. For ONGC, a barrel of crude oil could have got $106.72 last year but the compulsion of bearing a subsidy of $65.75 a barrel, left it with a net realisation of just $40.97. The subsidy burden on the upstream companies-ONGC, Oil India and GAIL (India) together-has soared from Rs 14,400 crore in 2009-10 to Rs 67,021 crore in 2013-14 but lower prices and no burden sharing in the fourth quarter may bring down their burden to around Rs 45,000 crore in 2014-15.
The government is working on a formula that will give upstream companies immunity from subsidy sharing by way of discounts on crude and refined fuels if global oil prices average up to $60 a barrel in a quarter. For prices beyond $60, the companies will have to give a discount of 85 per cent of the incremental oil prices and this discount will rise to 90 per cent for beyond $100 a barrel. That explains why moderate crude prices are critical for the government, both to keep the oil subsidy under control and to enhance the valuations of its upstream companies as they get ready for disinvestment.