OIL wants loss-sharing formula reworked

Burdened with the impact of subsidising the retail losses of downstream oil marketing companies (OMCs), Oil India Ltd has asked the Union government to take the average of the last five years' net profit for calculating the proportionate share of upstream companies, against the current practice of the last three years' average.

Since we are growing bigger and doing better, this calculation is resulting in an adverse subsidy sharing ratio. Either the ratio should be flat or a five-year term. This will bring down our share of subsidy sharing," a senior OIL executive said.

Upstream oil companies bear 33 per cent of the revenue that fuel retailers lose on selling diesel, domestic cooking gas (LPG) and kerosene at government-controlled rates. A similar amount is contributed by the government by way of cash subsidy. The rest is either absorbed by the retailers or passed on to consumers.

Of the 33 per cent subsidy the upstream companies -- Oil and Natural Gas Commission, OIL and GAIL India -- bear, OIL's share is 11 per cent or 3.3 of the gross under-recoveries. ONGC and GAIL bear 82 and seven per cent, respectively.

Under-recoveries, are the losses incurred by the OMCs from the sale at a discount to the cost price. OIL said considering the company was growing and making better profit, it ended up paying more.

"Four years ago, we were paying nine per cent of the 33 per cent. It has now gone up to 11 per cent," the official added. "We want the government to limit our subsidy burden. More than the savings it will result in, we want the process to be fair and equitable."

Last year, the subsidy-sharing formula for upstream companies was changed, with companies required to share the subsidy based on the last three years' average profit ratio rather than the last one year's.

"This was done to incentivise the efficient player. Moving from one year to three years has resulted in OIL benefiting Rs 4,500 crore (Rs 45 billion) for 2010-11," said Deepak Pareek, research analyst-institutional

equities at Prabhudas Lilladher, in a report.

For 2011-12, the finance ministry has provided Rs 30,000 crore (Rs 300 billion) to oil companies, which covers less than half their Rs 64,900 crore (Rs 649 billion) revenue loss on fuel sales in the first half of the year.

About Rs 32,000 crore (Rs 320 billion) has been the revenue loss in the third quarter, of which the petroleum ministry wants the finance ministry to provide two-thirds (Rs 22,000 crore).

Last November, the government had estimated Rs 1,32,000 crore (Rs 1320 billion) as the gross under-recovery but Crisil Research puts the figure higher, at Rs 1,40,000 crore (Rs 1400 billion) compared to Rs 78,190 crore (Rs 781.9 billion) in 2010-11.

Since 2006-07, the government's share of the subsidy burden has ranged between 45 per cent and 68 per cent; the upstream oil companies have borne about 33 per cent and OMCs have absorbed the remainder.

However, the absence of a fixed annual sharing mechanism for under-recoveries and the uncertain timing of cash payouts from the government adversely affect the profitability and working capital.

Crisil further says it expects the upstream oil companies to share 40 per cent of the under-recoveries, Rs 56,000 crore (Rs 560 billion), up from 33 per cent in the past.

According to the research agency, the rising under-recoveries may push some of the OMCs into the red for the first time in their history, as decreased profits from the refining business will not be adequate to offset their marketing losses.

"The refining profits for 2011-12 are likely to decline by 25-30 per cent to Rs 12,000-13,000 crore," says Sridhar Chandrasekhar, head, Crisil Research.

OIL is also expecting the government  to provide  a minimum net realisation of around $60 per barrel for the current financial year. Last week, the company told Business Standard it was holding a significant cash balance and was in advanced talks for  acquiring a producing property in the African region, for Rs 5,000-6,000 crore (Rs 50-60 billion).