ONGC may slip on subsidies

India's largest crude oil producer Oil and Natural Gas Corporation (ONGC) is on the verge of reporting "losses" on every barrel of crude oil that it sells due to the high subsidy burden that it has to bear.

This would be the first time that ONGC will post negative margins on crude oil sales. This loss comes at a time when crude oil producers around the world are making windfall profits due to record highs in oil prices.

The company's margin on oil sales is currently at an all-time low of around 15 cents per barrel, almost a tenth of what it was two years ago. Globally oil companies around the world have margins of over $2 per barrel.

"If oil prices increase any further, our margins on oil sales will turn negative," ONGC Chairman and Managing Director RS Sharma told Business Standard.

The company plans to write to the petroleum ministry soon urgently seeking a reduction in the subsidy share paid to the oil marketing companies, he said.

The near-doubling of crude oil prices that government-owned refiners paid in the last 14 months and the cap on retail prices of petrol, diesel, LPG and kerosene have resulted in retail losses of the oil marketing companies rising to around Rs 72,000 crore this financial year, compared with around Rs 54,000 crore in the last financial year.

ONGC bears 33 per cent of this burden.

The company's gross realisations from a barrel of crude oil in the current quarter are projected to go up to around $93 per barrel, while the projected net realisation "" after accounting for the subsidy "" is projected to be 43 per cent lower at $53 per barrel.

In the December quarter of 2006-07, the net realisation was only 21 per cent lower than the gross realisation of $62 per barrel (see chart).

"The cost of producing crude oil has more than doubled in the last year-and-a-half. The cost of services, of rigs, of inputs such as steel has risen exponentially. A 33 per cent subsidy payout will soon make the cost of production higher than the net realisation from a barrel of oil," said another senior ONGC official.

In short, the more oil ONGC sells the more profit it forgoes on account of the subsidy.

"We are probably the only oil producer for whom high crude oil prices are not a positive," the ONGC official said.

The company recorded 6.4 per cent lower profits in the December quarter of the current financial year compared with the same quarter a year ago as a result of a higher subsidy payout.

"We produce around 27 per cent of the country's crude oil requirement. But we bear 33 per cent of the retail losses of the marketing companies. The method is not fair or equitable," Sharma said.

"Our burden has to be lower than 27 per cent if we are to continue making profits," he added.

ONGC already loses around Rs 700 crore annually for selling natural gas below the cost of production. It has sought a 40 per cent increase from the current rate of $1.97 per million British thermal unit (mBtu) or Rs 3.2 per cubic metre.