NEW DELHI: The Petroleum Ministry has send a proposal to the Finance Ministry to exempt upstream companies like ONGC and Oil India Limited from any contribution towards fuel subsidy bill. With sharp slump in global crude oil prices, currently hovering below $30 per barrel, the exploration companies may face operational losses as it has crossed its average cost of production of $35 per barrel.
The move will help the companies to boost their profitability and clear roadblocks for any future market offering of their shares. According to oil ministry official, the matter has already been discussed with the Finance Ministry and it could soon notify the changes through amendments in the fuel subsidy-sharing mechanism.
The oil ministry believes this is the right time, when crude oil is declining continuously, and government increasing excise duty on fuel can provide a cushion to bear oil subsidy burden from its budgetary resources alone. The upstream companies were projected to contribute about Rs 5,000-6,000 crore in FY16.
At present, upstream companies are required to provide subsidy for the under recoveries of oil marketing companies on the sale of kerosene above Rs 12 per litre. Analysts feel, with Brent crude oil seeing levels below $35 per barrel will start hitting the oil exploration companies like ONGC. A rapid appreciation of the dollar may send Brent oil to as low as $20 a barrel, according to Morgan Stanley.
The changes in the subsidy formula would allow upstream firms to save Rs 750-1,000 crore towards kerosene subsidy contribution that they would have paid in the second half of FY16. It would also leave them with additional resources to carry forward exploration and production activities in the future without bothering about unrelated subsidy dole.
During the year 2014-15, the upstream firms provided Rs 42,823 crore (ONGC Rs 36,300 crore, OIL Rs 5,523 crore and GAIL Rs 1,000 crore) as their share of subsidy contribution.
The oil ministry pushed for exempting ONGC and OIL from subsidy contributions as according to a projection by the petroleum planning and analysis cell (PPAC), under-recovery in the case of PDS kerosene has fallen to Rs 9.16 per litre from Rs 12.93 per litre in the previous month.