ONGC, OIL exempted from LPG subsidy payments this fiscal

In a big boost to domestic oil and gas exploration, the government has decided to exempt state-owned Oil and Natural Gas Corporation and Oil India Ltd from paying for LPG subsidies in current fiscal, oil secretary Saurabh Chandra said on Tuesday.

"Government will fully meet subsidy burden of liquefied petroleum gas in 2015-16," he said at Federation of Indian Chambers of Commerce and Industry roundtable on Hydrocarbons in New Delhi.            

“The government regulates price of cooking fuels LPG and kerosene to shield the poor. The difference between the cost and the retail selling price, called under-recoveries, is borne by the government by way of cash subsidy and upstream producers like ONGC.

Upstream oil and gas producers ONGC, OIL and GAIL had to borne a portion of subsidy on cooking fuels LPG and kerosene and diesel till October 2014.

After diesel price was deregulated in October 2014, the subsidy sharing was limited to LPG and kerosene.

"Since upstream national oil companies contribution to under-recoveries is reduced, to that extent their resources are freed to invest in exploration and production," he said.

Chandra said the government has exempted ONGC and OIL from payment of fuel subsidy in the fourth quarter after the Finance Ministry agreed to meet the revenue loss on fuel sales.

The Finance Ministry will pay Rs 5,324 crore (Rs 53.24 billion) in fuel subsidy for the January-March quarter, effectively meeting all revenue retailers losses on selling domestic LPG and kerosene at government-controlled rates.

Under-recoveries, or revenue retailers' loss on selling fuel below cost, of Rs 67,091 crore (Rs 670.91 billion) in first nine months of the fiscal were fully accounted for by the subsidy support and dole out from upstream firms like ONGC.

The under-recoveries of Rs 5,324 crore (Rs 53.24 billion) for the March quarter are being entirely borne by the government.

The oil secretary said since the government is paying LPG subsidy directly to consumers in their bank accounts under the Direct Benefit Transfer scheme, it has been decided that this will be entirely met from the Budget.

ONGC and OIL will have to bear subsidy on only kerosene in 2015-16, he said.

Based on average crude oil price of $60/barrel, LPG subsidy for 2015-16 may be about Rs 18,000 crore (Rs 180 billion) and assuming crude at $70/barrel, it could be in the vicinity of Rs 25,000 crore (Rs 250 billion).

For Kerosene, it will be Rs 13,000 crore (Rs 130 billion) at $60/barrel and Rs 16,500 crore (Rs 165 billion) at $70 per barrel oil price.

In the first nine months of 2014-15, the government gave cash subsidy of Rs 22,085 crore (Rs 220.85 billion) to meet less than a third of the under-recoveries on cooking fuel and diesel (up to October 17).

Upstream oil producers ONGC, OIL and GAIL chipped in Rs 42,822 crore (Rs 428.22 billion).

The upstream subsidy contribution is by way of discount on crude oil they sell to refineries.

With international oil prices almost halving to $57-58 per barrel, providing the subsidy discounts would have meant they got rates way below their cost of production.

ONGC's cost of production is around $40 per barrel.

The Oil Ministry had projected that government will earn Rs 75,944 crore (Rs 759.44 billion) from excise duty levy on petrol and diesel this fiscal and even after paying for Rs 39,101 crore (Rs 391.01 billion) subsidy (Rs 17,000 crore or Rs 170 billion of first half and Rs 22,101 crore or Rs 221.01 billion in second half), it will be left with Rs 36,843 crore (Rs 368.43 billion).