No oil subsidy burden for Reliance

ONGC fears entire net profit will erode if subsidy-sharing scheme continues for 3 quarters.

In a relief to petroleum refining companies like Reliance Industries Ltd, the government has decided to keep them out of the subsidy-sharing mechanism during the first quarter of 2005-06.

Officials said that stand-alone refiners in the public sector like the Mangalore Refinery and Petroleum Ltd have also been kept out of subsidy-sharing scheme.

The heaviest burden is on Oil and Natural Gas Corporation (ONGC) which has been asked to share Rs 2,876 crore, out of total under-recoveries of Rs 6,514 crore.

"At this rate and based on the assumption that the company booked a net profit of Rs 12,983 crore during 2004-05, the entire net profit of the company will stand eroded if the government continues with the subsidy-sharing scheme for the next three quarters," said an ONGC executive.

Gail India Ltd's share in the subsidy burden will be Rs 153 crore against Rs 221 crore paid during the first quarter of 2004-05.

Petroleum Minister Mani Shankar Aiyar and officials of his ministry had publicly claimed that private companies would be asked to share the subsidy burden being incurred by oil marketing companies in selling petroleum products below the import parity price.

Industry sources said RIL and OMCs were holding discussions whereby RIL would offer them "favourable commercial terms" for sale of petroleum products.

"The contentious issue was whether these terms should be applicable with retrospective effect from April 1, 2005 or from the date of reaching the agreement," said an oil company executive.

Under the sharing mechanism, conveyed to oil companies every quarter, only upstream companies, Oil and Natural Gas Corporation, Gail India and Oil India Ltd, were sharing OMC losses.

Total losses were divided into three portions, with one-third of it being borne by upstream companies. The share of each upstream company in this is decided by determining gains made by a company in its profit after tax on account of import parity.

Another one-third is recovered by OMCs from the prices of petrol and diesel, while they take a hit of one-third on their balance sheet.

The rationale for such a scheme is that upstream companies are beneficiaries of increases in international prices since they are paid the import parity price by refineries.

By the same logic, the government was planning to bring refineries under the scheme since they are paid the import parity price by OMCs.

According to the burden-sharing scheme, ONGC will need to give a discount of around $15 a barrel on crude oil it sells to OMCs for being processed at their refineries. This discount will be over and above the $4 price advantage being given by it.

Fine points

• Public Sector refiners like Mangalore Refinery and Petroleum Ltd have also been kept out
  
• The burden is heaviest for ONGC. It has been asked to share Rs 2,876 crore
  
• Gail India Ltd share will be Rs 153 crore