State-owned Oil and Natural Gas Corp (ONGC) has said its net profit will drop by over 47 per cent to below Rs 10,000 crore (Rs 100 billion) this fiscal if the government forces it to shell out a higher fuel subsidy.
Upstream oil firms, led by ONGC, traditionally bear one-third of the actual revenue that retailers lose on selling diesel, LPG and kerosene at government-controlled prices.
But this year, the share of upstream companies would not be based on the actual under-recoveries, or revenue losses, of retailers. Rather, they would be based on the projected notional under-recoveries that existed before the June fuel price increase and duty cuts.
At a USD 110 per barrel crude oil price, the revenue loss before the June price hike was estimated at Rs 171,140 crore (Rs 1,711.4 billion), while at today's prices, it stands at around Rs 121,140 crore (Rs 1,211.40 billion).
ONGC, in a letter to the Oil Ministry, said the one-third share of upstream companies as per the June estimates works out to Rs 57,041 crore (Rs 57.041 billion), of which ONGC's share would be Rs 47,361 crore (Rs 473.61 billion).
But if current estimates, are taken the upstream share would be Rs 40,380 crore (Rs 33,528 crore of ONGC). The company gives discounts on the crude oil it sells to Indian Oil, Bharat Petroleum and Hindustan Petroleum to part- meet the revenue loss retailers incur on subsidised fuel sales.
"In such a scenario (where upstream firms are asked to pay one-third of the projected under-recoveries in June), the price realisation of ONGC would be USD 41.27 per barrel," it wrote.
ONGC said it expects to register a net profit of Rs 15,000 crore (Rs 150 billion) in the 2011-12 fiscal, based on a net crude oil price realisation of USD 55 per barrel.
"In case realisation is of the order of USD 40 per barrel, the profit-after-tax would be below Rs 10,000 crore (Rs 100 billion)." It had in 2010-11 reported a net profit of Rs 18,924 crore (Rs 189.24 billion).
ONGC said a lower profit would hurt its Rs 30,000 crore (Rs 300 billion) planned capital expenditure and also impact plans to provide another Rs 7,500 crore (Rs 75 billion) in financial support to its overseas subsidiary in 2011-12.
Stating that it normally caters to investment plans from its internal resources, it said even at a net profit of Rs 15,000 crore (Rs 150 billion), the company faced a shortfall of about Rs 12,500 crore (Rs 125 billion) in meeting its planned expenditure and assistance to ONGC Videsh Ltd in FY'12.
"However, in case ONGC's net realisation for 2011-12 works out to USD 40 per barrel, ONGC's profit-after-tax is expected to fall down below Rs 10,000 crore (Rs 100 billion) and the deficit would increase to Rs 17,500 crore (Rs 175 billion),"
ONGC had in 2010-11 paid Rs 24,892 crore (Rs 248.92 billion) out of the total upstream fuel subsidy share of Rs 30,297 crore (Rs 302.97 billion). In the first quarter of current fiscal, it paid Rs 12,046 crore (Rs 120.46 billion) to compensate for fuel subsidies.
ONGC has not been able to get any significant price advantage from the increase in crude oil prices due to sharing of under-recoveries, as the cost of procurement of oilfield services and materials have increased significantly, the company wrote.
"(Out of) every rupee increase in ONGC's revenue from crude oil, about two-third amount is contributed to the central/state government by way of incremental royalty, VAT/central sales tax, corporate tax, dividend and dividend distribution tax," it said.
The company said if its share of under-recoveries was reduced, this would result in a corresponding increase in the revenues it contributes to the government exchequer.
ONGC said the upstream share of under-recoveries should be 33.33 per cent if crude oil prices remained below USD 70 per barrel.
However, it should reduce to 30 per cent if crude rises to USD 75 per barrel and progressively reduce with every dollar increase in oil price.
The upstream subsidy share should be limited to 25 per cent at times when oil prices cross USD 100 per barrel, it said.
"The Ministry of Petroleum and Natural Gas is requested to notify a fair and transparent mechanism for sharing of under-recoveries," the company wrote.
