Settlement Of Royalty Claim By Centre Credit Positive For ONGC, Oil India: Moody’s
Government’s decision negates uncertainty over royalty liability: Moody’s
The central government’s decision to pay the royalty amount claimed by the governments of Gujarat and Assam is credit positive for Oil and Natural Gas Corp. Ltd. (ONGC) and Oil India Ltd. (OIL), ratings agency Moody’s said in a report.
It removes the uncertainty over Rs 26,100 crore ($3.9 billion) of contingent royalty liability for both companies without resulting in any further cash outlay from these companies, the report said.
The Centre on Tuesday agreed to pay the Assam government Rs 6,323 crore as royalty for onshore drilling by ONGC and OIL after the parties involved settled the dispute.The apex court had on Monday disposed of a similar case between ONGC and the Gujarat government involving a royalty payment of Rs 8,392 crore, after the Centre agreed to foot the bill.
The Oilfields (Regulation and Development) Act of 1948 mandates oil producers to pay 20 percent of the market value of crude they extract as royalty to the state where oil blocks are located.
As of December 2016, ONGC and Oil India reported contingent royalty liabilities of Rs 15,700 crore and Rs 10,400 crore for production from April 2008, Moody’s data showed.
However, the central government has now decided to pay the remaining royalty claims for production between April 2008 and January 2014.
The amounts already paid, which have been treated as deposits by the companies, will no longer be recoverable and will lower the companies’ pre-tax incomes for the fiscal year ending March 2017 by the respective deposit amounts.Moody’s Report
India’s fuel subsidy is also borne by the central government and state-owned oil companies.
Lower crude oil prices in 2015 prompted the central government to remove fuel subsidy burden for ONGC and Oil India, bringing in pre-discount and post discount prices at par. No subsidies also meant no additional royalty claim on onshore production, Moody's wrote in a note.
"Over the next 12-18 months, we expect the fuel subsidies to remain low as we expect the oil prices will not increase and stay above $60 per barrel for a prolonged period of time. Thus, the royalty issue will not be a concern for at least next 12-18 months." the report said.