Budget Watch: Will oil companies have the cushion of a mega net zero fund?

Rs 15,000 crore fund has the potential to open up major capex for green projects

The fate of the Rs 15,000 crore fund aimed at energy transition and net zero objectives, announced for state-owned oil marketing companies (OMC) in last year's Budget but never disbursed, is still hazy ahead of the Union Budget for FY 2024-25.

While it has remained a key task for the Petroleum and Natural Gas Ministry at inter-ministerial consultations so far, officials said the Finance Ministry remains unconvinced of the merits of retaining it in the upcoming Budget at a time when the OMCs are ringing in record net profits.

Budget 2023 (for FY2023-24) had earmarked a mega capital outlay of Rs 30,000 crore for priority capital investments. The record-high budgetary grant for green transition was to be a key driver in reducing the economy's carbon emissions and leaping towards green fuels and energy sources.

 

It was set to focus on investments in new-age fuels — green hydrogen, ethanol, and other biofuels, with the capex pipeline expected to firm up from FY24 (2023-24) onwards. However, it was never disbursed, and the interim Budget presented in February this year, halved the fund to Rs 15,000 crore. The equity infusion was also deferred to the next financial year or FY25 (2024-25).

In its initial deliberations with the Finance Ministry, the Petroleum Ministry has requested that the capital outlay not be cut. "The fund is necessary for bringing in key net zero projects, and we have requested it be retained. Once implemented, these projects will have a multiplier effect on the green economy, " a Petroleum Ministry official said.

However, the Finance Ministry has pointed to unprecedented levels of profits booked by OMCs to ask why they can't bankroll their energy transition goals on their own, another official pointed out.

The combined profit of the public sector OMCs—IOCL, BPCL, and HPCL—rose to Rs 86,000 crore in FY24, over 25 times higher than the preceding year. In FY23, IOCL and BPCL's combined profit of Rs. 20,224 crore was countered by HPCL's loss of Rs 8974.03 crore.

Back and forth

But the Petroleum Ministry has argued the situation may change owing to increasing stress on international shipping lanes, and rising freight charges.

"The wars in Ukraine and Gaza, and subsequent threats by Iran-backed Houthi militants to shipping in the Red Sea and Gulf of Aden have already kept tensions elevated and the oil trade volatile. Our projections show global oil prices may become volatile in the second half of 2024 and the next year, given the increasing hostilities in the Red Sea region. During inter-ministerial consultations, we have tried to raise that point,” the official mentioned above said.

The Ministry has also pointed out that since it has the highest fossil fuel footprint among ministries in the country, a special dispensation be made to help its constituent entities steer the energy transition journey, 'especially considering the steep targets they have set for themselves', officials said. While IOCL has targeted net-zero operational emissions by the year 2046, both BPCL and HPCL hope to reach that level by 2040.

Meanwhile, OMCs reduced petrol and diesel pump prices by Rs 2 in March, after a record 22 months of unchanged prices. "The OMCs have not raised prices throughout the war in Ukraine and the repeated incidents of hostility between Israel and Iran. They need to be supported," another Petroleum Ministry official said.