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Govt sets interim rule exempting discount to retailers if crude prices average above $60/ barrel

22 May 2015 Evaluate

In a bit of a relief for upstream oil companies, India’s oil ministry has set interim rules for these companies, which exempts them from giving any discount on crude and refined fuel sales if the global crude oil prices average up-to $60 a barrel. However, this new rule would only be applicable for three months to June and would require finance ministry’s approval to be extended. With such kind of arrangement, upstream oil companies will not have to pay any subsidy as long as crude prices average $60 or less.

As per the present arrangement, upstream companies like Oil and Natural Gas Corporation (ONGC), Oil India and Gail India sell crude oil and fuels like cooking gas at discounted rates to partially compensate retailers for the losses they incur while selling fuels at government set cheaper rates. Despite the present exemption, these companies will have to give 85% discount of the incremental price to these retailers, if the prices of global crude oil fluctuate between $60-100 per barrel.

Notably, last quarter, the government had exempted ONGC, Oil India, and GAIL from paying a subsidy after a crash in global crude prices. Currently global oil prices are hovering at about $66 a barrel.

Last year, Oil Ministry sought the finance ministry’s approval for a formula to end arbitrary decisions on the size of subsidy payments by companies like ONGC, in which the Centre wants to offload a 5% stake. On the top of the discount, state-run fuel retailers - Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum - are compensated by the finance ministry for selling cooking gas and kerosene at cheaper rates.

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