Oil and Natural Gas Corporation (ONGC), the country’s biggest crude oil producer, has suggested a fresh crude oil matrix-based subsidy sharing formula to the petroleum ministry. Last year, the company had suggested a similar formula to the Kirit Parikh group but it was not accepted.
ONGC wants the proposed formula to be accepted before it comes out with a follow-on stock issue in March. “We have suggested a long-term option for subsidy-sharing. The basic model will remain the same as was recommended to the Parikh committee. However, lower rates are being proposed. More discussions will take place before it gets crystallised,” said a top company executive.
Based on ONGC’s presentation, the Parikh committee, in the report submitted February last year, recommended an incremental rate of taxes on higher crude oil price realisation from the nomination blocks of ONGC and OIL to keep the government’s subsidy share in the range of Rs 19,780-Rs 23,340 crore at various levels of crude prices. For instance, if crude realisation ranged between $60-70 per barrel, the producer would have to pay 20 per cent incremental tax and if it ranged between $70-80, the producer would have pay 40 per cent incremental tax.
Both ONGC and OIL would have gained significantly, had this mechanism been accepted. In the case of ONGC, the company paid Rs 28,225 crore as subsidy in 2008-09, but under the Kirit Parikh formula, it would have to pay pay a subsidy of only Rs 8,200 crore. The gain to ONGC bottom line would have been Rs 11,014 crore after paying 45 per cent as royalty and tax amounting to Rs 9,011 crore.
Under the current one-third burden sharing mechanism, ONGC, OIL and GAIL would need to bear around Rs 24,288 crore subsidy burden during 2010-11. The government has estimated gross underrecoveries to be around Rs 73,600 crore if the benchmark Indian basket averages $90 a barrel in the fourth quarter ending March 2011.
Since 2006, the government has been asking public sector upstream oil and gas producing companies to share the subsidy burden of oil marketing companies (OMCs) on the ground that these companies get a higher return on their production when international prices move up.
