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Subsidy burden hits ONGC growth plans

Disproportionate rise in fuel subsidy is posing a serious threat to output growth and global acquisition of India’s top upstream company ONGC.

Published: 27th November 2013 06:00 AM  |   Last Updated: 27th November 2013 03:04 AM   |  A+A-

Disproportionate rise in fuel subsidy is posing a serious threat to output growth and global acquisition of India’s top upstream company ONGC.

In a letter to the government, ONGC said the net price that it realises after subsidy and discounts has been falling leaving little room for the oil exploration behemoth.

Oil and gas producers like ONGC and Oil India make up for a part of losses fuel retailers incur on selling diesel and cooking fuel at government controlled rates. This subsidy payout is by way of discounts they offer on crude oil sold to them.

As against a cost of production of $40 per barrel of oil (without considering return on investment), ONGC got a net price of $40.17 a barrel in Q1 of this fiscal.

“There has been significant reduction in ONGC’s net realised prices over the years i.e. from $54.72 per barrel in FY’12 to $47.85 a barrel in FY’13 and to $40.17 in Q1 FY’14,” it said.

Since 2004, the company has paid Rs 216,336 crore in fuel subsidy, but for which its net profit would have been higher by Rs 125,477 crore that is enough to buy properties producing 10-15 million tons of oil per annum.

“Due to increasing burden of subsidy sharing, profit from crude from nominated blocks has already eroded by almost 50% over the last 3 years,” it said.

ONGC said it needs a minimum price of $65 per barrel, without which the investments planned in redevelopment of old and ageing fields will not be commercially viable.

“We reiterate that owing to the current under-recovery sharing mechanism, ONGC’s endeavours to grow domestic hydrocarbon production as well as to enhance India’s energy security through international oil and gas equity are under serious threat,” it said.

“ONGC needs a realisation of about $65 per barrel to generate sufficient cash to meet out our future capex plans,” it said, adding the company has laid out plans to spend over `163,000 crore in 12th Five-year Plan.

ONGC in its letter termed the present subsidy sharing mechanism as lop-sided, it said continuation of the existing system would hamper not only ONGC’s growth plan and its long term sustainability but also country’s interest. (With agency inputs)



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