For Oil and Natural Gas Corporation [ONGC] and Oil India Ltd [OIL] – central public sector undertakings [PSUs] in the business of oil and gas exploration and production, the year 2016-17 brings unprecedented cheer. The ministry of petroleum and natural gas [MPNG] has proposed that the government won’t be asking them to share the burden of subsidies on LPG and kerosene. To put things in perspective, a bit of background is in order.
During 2004-2014, under directions from then government, ONGC and OIL offered discount on supply of crude to downstream oil PSUs viz., Indian Oil Corporation Limited [IOCL], Hindustan Petroleum Corporation [HPCL] and Bharat Petroleum Corporation [BPCL] to cover a portion of under-recoveries that latter incurred on sale of LPG, kerosene and diesel [up to October, 2014] and petrol [up to June, 2010] at prices below cost of production.
The percentage of under-recoveries shared by them varied from year-to-year and had escalated to more than 50% during 2013-14 in total under-recovery of Rs 139,000 crores. Till the end of third quarter of 2014-15, ONGC alone had cumulatively contributed a total of around Rs 309,000 crores. There could not be more glaring example of a PSU being used as a ‘milch cow’ to support government’s largess e.
The extant system of sharing was opaque and un-predictable. As per a formula used in 2013, discount was fixed at US$ 56 per barrel irrespective of prevailing crude price. This meant that even at US$ 100 per barrel, it barely got US$ 44 per barrel. At US$ 50 per barrel [in March, 2015, price had plummeted to this level], we had a patently absurd situation whereby, it would have to give US$ 6 per barrel in addition to ‘free’ supply to downstream oil PSUs!
The denudation of the surpluses on such a monumental scale deprived ONGC/OIL of the much needed resources for increasing domestic production of oil and gas. Today, India’s dependence on imported crude is 80% whereas in gas, it is over 50%. But, for this plunder, the scenario in regard to our energy security would have been much better. ONGC also suffered a collateral damage.
According to Oil Field Act (OFA), it is required to pay royalty @ 20% on market value of crude oil it extracts from oil fields to state government. Due to discount, since ONGC was getting less, from 2008, it started paying royalty on the net price. However, Gujarat government took the matter to Gujarat High Court (GHC) which ordered royalty payment on full price. As result, ONGC is saddled with a huge liability of Rs 10,000 crores for the period 2008-2013.
ONGC also lost heavily in market perception. In 2014-15, government had aimed at garnering about Rs 18,000 crores from divestment of 5% its shares but was forced to drop. This was because of steep decline in market price of its share from Rs 472 in June, 2014 to Rs 320 in March, 2015 due to lukewarm investor’s perception. In the road shows held in November, 2014, foreign investors shared their discomfiture over the policy of sharing under-recoveries.
Under Modi – dispensation, things started looking up. First, it decided not to ask ONGC/OIL to contribute any amount towards under-recoveries during January – March, 2015. During 2015-16 also, the burden sharing was drastically reduced. During first half, ONGC contributed only Rs 1,730 crore a decline of 93.6 per cent from Rs 27,031 crores shared during first half of 2014-15. OIL contributed only Rs 250 crore down 93.8 per cent from Rs 4032 crores. Put together, the duo shared a paltry 12 per cent on a lower under-recoveries during first half of 2015-16 against 62 per cent in first half of 2014-15.
Taking this forward, MPNG has now proposed that during 2016-17, ONGC/OIL will be fully exempt from making any contribution towards under-recoveries. If, the cabinet approves and government stays with this commitment for all time to come, this will give a boost to their growth prospects. The real impetus will come when crude price starts moving up leading to substantial gains for these PSUs. Resultant surpluses will enable them to fund their investment needs thereby accelerating India’s march towards energy security.
One may argue that the main trigger for exempting ONGC/OIL now is that under-recoveries have declined sharply from Rs 139,000 crores in 2013-14 to Rs 72,000 crores during 2014-15 and further to only Rs 30,000 crores during 2015-16. During 2016-17, it is estimated to be even lower at Rs 26,947 crores. When, the overall burden itself is low, there is no need for any sharing.
However, the real test will be when under-recoveries start increasing yet again which could happen when crude price rebounds. It is unlikely that the government will fail this test. This is because with diesel already decontrolled [November 1, 2014] and likewise petrol much earlier [June, 2010], only LPG and kerosene are currently under subsidy ambit. While LPG is covered under direct benefit transfer [DBT] [from January 1, 2015], kerosene too will be covered soon.
The underlying premise of DBT is that even as oil PSUs viz., IOCL/BPCL/HPCL sell at full/market price, the subsidy is directly credited in to the bank account of the beneficiary. With this fundamental change, the government has taken the entire burden on its balance sheet. Hence, even when oil price shoots up leading to higher burden, it will necessarily have to cover from its budget thus ruling out any sharing by upstream PSUs viz., ONGC/OIL.
The switch-over to DBT will have the added advantage of government being forced to implement reforms for curbing these subsidies. For instance, the decision to increase kerosene price by Rs 0.25 per litre every month is a good move in this direction. Likewise, exclusion of persons earning more than Rs 1 million per annum from ambit of LPG subsidy is welcome. However, given that bulk of these subsidies are being cornered by rich/better-off, Modi should go for ‘big bang’ to cut them instead of current gradual approach.
Hopefully, Modi – dispensation during its remaining term and successive governments will stay on course leaving ONGC and OIL free to catapult them to a position from where they can meet at least 50% of India’s energy needs by 2025.