Govt may exempt ONGC, OIL from fuel subsidy payment in FY15 due to oil price slump

The government is likely to exempt state-run firms Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) from payment of fuel subsidy during the reminder of the ongoing 2014-15 financial year due to a steep decline in global oil rates to around US $50 per barrel.

Upstream producers ONGC and OIL made good nearly half of the revenue loss or under-recoveries that fuel retailers incurred on selling cooking gas (LPG) and diesel until recently at government controlled rates.

This subsidy contribution was by way of discount on crude oil they sold to the downstream firms and it was capped at US $56 per barrel in 2013. But with global oil prices collapsing to their lowest level since April 2009, the continuation of the subsidy-sharing formula would mean that ONGC will not just have to sell crude oil to refiners like Indian Oil (IOC) for free but also pay another US $6 per barrel from its pocket.

In such a scenario, the government is considering exempting ONGC and OIL from payment of subsidy during the remaining part of the current financial year, sources privy to the development said.

On Thursday, Oil Minister Dharmendra Pradhan had stated that the government was reworking the subsidy-sharing formula.

Sources said subsidy burden on upstream oil companies had increased from Rs 32,000 crore or 30 per cent of the total under-recovery in 2008-09 to Rs 67,021 crore (48 per cent of the total under-recovery) in 2013-14.

In FY14, ONGC paid a record Rs 56,384 crore in subsidies. This has significantly constrained the capacity of these state-run refiners to increase their exploration efforts in difficult areas, thereby adversely affecting the domestic oil production.

Under-recoveries during FY15 are pegged at around Rs 73,000 crore. Of this, about Rs 51,000 crore have already been accounted for in first half where ONGC paid Rs 26,841 crore subsidy, OIL Rs 4085 crore and GAIL Rs 1000 crore.

The government provided cash subsidy to cover the rest of it.

For the remainder of the fiscal, another Rs 21,000-22,000 crore of under-recoveries are estimated which can easily be met by government subsidy from budget and sparing ONGC, they said.

Sources said the oil ministry is of the view that unless sufficient funds are available for increased oil recovery and enhanced oil recovery schemes from the ageing oil fields, the country may notionally lose more than 70 million tonnes of indigenous crude oil production during next 10 years.

This may increase the import bill by Rs 3,33,000 crore. However, if this crude is produced indigenously, it will cost only Rs 112,000 crore resulting in a substantial saving of Rs 2,21,000 crore.