Govt rejects panel's idea on oil subsidy sharing
1-Jan-1970


The petroleum ministry has rejected the crude oil matrix-based subsidy-sharing formula for Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), as suggested by the expert committee headed by Kirit Parikh. The ministry, however, wants to keep the share of these companies, along with GAIL India, at a third of total under recoveries.

The gross under recoveries incurred by oil marketing companies (OMCs) on selling auto and cooking fuels below the market price is expected to be around Rs 53,100 crore at a crude oil price level of $75 a barrel. Of this, the total burden on ONGC, GAIL and OIL would come to around Rs 17,700 crore this year, according to the one-third-sharing mechanism. "The upstream companies had been contributing for a third of the under recoveries. It is the maximum that they will be made to bear this year also, depending on their financial performance," petroleum secretary S Sundareshan told Business Standard.

A group of ministers had on June 25 partially accepted the Kirit Parikh committee report on petroleum pricing, when it decontrolled petrol prices and said diesel prices, too, would be decontrolled. It left the issue of upstream sharing open. Sundareshan said discussions on the mechanism for burden-sharing would be worked out after discussions with the finance ministry.

Since 2006, the government has been asking upstream oil and gas producing companies to share the subsidy burden of OMCs on the ground that these companies get a higher return on their production when international prices move up. ONGC?s margin on sale of crude oil is roughly $20 a barrel more than its cost of production since 2005-06, even after subsidy sharing in the form of discounts to refineries.

The three companies, which are listed entities, have raised concerns on the ad-hoc way the subsidy share is decided by the government, since it creates uncertainty for their profits. Based on a proposal from ONGC, the Kirit Parikh committee had recommended an incremental rate of taxes on higher crude oil price realization from the nomination blocks of ONGC and OIL to keep the government?s subsidy share in the range of Rs 19,780-23,340 crore at various levels of crude, against the current practice of fixing their burden at a certain percentage, irrespective of crude oil realization.

ONGC had also suggested a price-linked subsidy formula. "There is no decision to accept that for the reason that the levels of contribution suggested by the Kirit Parikh committee are not in consonance with the views of the government at this juncture. The upstream companies would bear a higher burden than what the committee recommended," Sundareshan said.



Source: Business Standard, Delhi, Monday, 9th August 2010
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