Oil slump fallout: India may cut subsidy burden on ONGC, OIL

The Indian government is likely to exempt state-owned producers Oil & Natural Gas Corp and Oil India Ltd from paying fuel subsidies during the rest of the financial year up to March due to steep decline in global oil rates to around $50 per barrel.

The two upstream producers ONGC and OIL recovered nearly half of the revenue lost by being forced to subsidise fuel retailers at government controlled rates.

The subsidy contribution was through discounts on crude oil sold to downstream firms, and it was capped at $56 per barrel in 2013.

But with global oil prices tumbling to their lowest levels 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 Corp (IOC) virtually for free but also pay another $6 per barrel from its funds.

On Thursday, petroleum minister Dharmendra Pradhan stated that the government was reworking the subsidy-sharing formula.

Reports said the subsidy burden on upstream oil companies has increased from Rs32,000 crore or 30 per cent of the total under-recovery in 2008-09 to Rs67,021 crore (48 per cent of the total under-recovery) in 2013-14.

In 2013-14, ONGC paid a record Rs56,384 crore subsidy. This has significantly constrained the capacity of these companies in increasing their exploration efforts in difficult areas, thereby adversely affecting the country's domestic oil production.

Under-recoveries during current fiscal are pegged at around Rs73,000 crore. Of this, about Rs51,000 crore have already been accounted for in first half where ONGC paid Rs26,841 crore subsidy, OIL Rs4,085 crore and GAIL Rs1,000 crore. Government provided cash subsidy to cover the rest of it.

For the remainder of the fiscal, another Rs21,000-22,000 crore of under-recoveries are estimated, which can easily be met by government subsidy from budget and sparing ONGC, they said.

The oil ministry is of the view that unless sufficient funds are available for increasing oil recovery and enhanced 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 Rs3,33,000 crore. However, if this crude is produced indigenously, it will cost only Rs112,000 crore resulting in a substantial saving of Rs2,21,000 crore.