ONGC Could Share Subsidy If Crude Prices Stay High
Oil and Natural Gas Corporation Ltd. said in its annual report that India’s largest oil and gas producer may have to share the subsidy burden with the government if crude prices remain at an elevated level.
ONGC used to share the subsidy till the quarter ended September 2015. Falling oil prices didn’t necessitate that since then. But crude prices have so far averaged 29 percent higher in the current financial year-on-year, according to data compiled by Bloomberg.
Auto fuels are no longer subsidised and are linked to market prices. The government, however, has allocated Rs 24,933 crore—Rs 20,377.8 crore for liquefied petroleum gas and Rs 4,555 crore for kerosene—towards subsidies for 2018-19 compared with Rs 24,460 crore in the previous year.
If it falls short of the budgeted estimates, ONGC can be asked to plug the gap. A shortfall in subsidy increases the earning risk for explorers if they were to share the burden, Morgan Stanley had said in a report. The impact of subsidy could be limited by increasing prices of subsidised fuels.
ONGC management had, in an earlier interview with BloombergQuint, said they have not been asked to share the subsidy burden yet.
Subsidy-sharing concerns are one of the reasons why the oil explorer’s share price has fallen when it should have ideally gained because of rising crude. The company’s stock has declined 16 percent so far this year compared with a 16 percent jump in Brent crude. The benchmark Nifty 50 index is up nearly 10 percent.
Weak Gas Prices
The price of gas produced in India is fixed and revised every six months under the government’s new pricing regulations. After the administered pricing mechanism was introduced in 2014, gas prices have fallen by over 30 percent. Despite two recent price hikes, the price at $3.06 a million British thermal units is lower than ONGC’s average cost of production of $3.59.
ONGC is incurring significant under-recoveries from its gas business, the company said in the annual report. “Loss of revenues on this count significantly impairs the company’s ability to fund its capex plans and hampers most ongoing and future development projects.”
ONGC on an average had a surplus cash of over Rs 11,000 crore through the financial years 2010-17, according to Bloomberg data. In the year ended March 2018, it became indebted after buying the government’s stake in Hindustan Petroleum Corporation Ltd. in a move intended to create an integrated oil company and help the government meet its divestment target. ONGC has announced that it plans to spend close to Rs 32,000 crore as capital expenditure to boost oil and gas production in the country.