Govt to exempt ONGC, OIL from fuel subsidy payment this fiscal

The government is likely to exempt Oil and Natural Gas Corporation and Oil India Ltd from payment of fuel subsidy during the rest of the fiscal due to steep decline in global oil rates to around $50 per barrel.

Upstream producers ONGC and OIL made good nearly half of the revenue loss or under-recoveries that fuel retailers incurred on selling cooking fuel and diesel until recently at government controlled rates.

This subsidy contribution was by way of discount on crude oil they sold to the downstream firms and it was capped at $56 per barrel in 2013.

But with global oil prices tumbling to its lowest level 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 Corporation for free but also pay another $6 per barrel from its pocket.

In such a scenario, the government is considering exempting ONGC and OIL from payment of subsidy during reminder of the current fiscal, sources privy to the development said.

On Thursday, Oil Minister Dharmendra Pradhan had stated that the government was reworking the subsidy-sharing formula.

Sources said subsidy burden on upstream oil companies has increased from Rs 32,000 crore (Rs 320 billion) or 30 per cent of the total under-recovery in 2008-09 to Rs 67,021 crore or Rs 670.21 billion (48 per cent of the total under-recovery) in 2013-14.

In 2013-14, ONGC paid a record Rs 56,384-crore (Rs 563.84 billion) subsidy.

This has significantly constrained the capacity of these companies to increase their exploration efforts in difficult areas, thereby adversely affecting the country's domestic oil production.

Under-recoveries during current fiscal are pegged at around Rs 73,000 crore (Rs 730 billion).

Of this, about Rs 51,000 crore (Rs 510 billion) have already been accounted for in first half where ONGC paid Rs 26,841 crore (Rs 268.41 billion) subsidy, OIL Rs 4085 crore (Rs 40.85 billion) and GAIL Rs 1000 crore (Rs 10 billion).

Government provided cash subsidy to cover the rest of it.

For the remainder of the fiscal, another Rs 21,000-22,000 crore (Rs 210-220 billion) of under-recoveries are estimated which can easily be met by government subsidy from budget and sparing ONGC, they said.

Sources said the oil ministry is of the view that unless sufficient funds are available for increased oil recovery and enhanced oil 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 Rs 3,33,000 crore (Rs 3,330 billion).

However, if this crude is produced indigenously, it will cost only Rs 112,000 crore (Rs 1,120 billion) resulting in a substantial saving of Rs 2,21,000 crore (Rs 2,210 billion).