OIL wants loss-sharing formula reworked

Oil India Ltd. | Oil Exploration | Oil & Gas | BSE: 533106 | NSE: OIL

24 Jan 2012 Evaluate

Burdened with the impact of subsidising theretail losses of downstream oil marketing companies (OMCs), Oil India Ltd hasasked the Union government to take the average of the last five years’ netprofit for calculating the proportionate share of upstream companies, againstthe current practice of the last three years’ average. Since OIL are growingbigger and doing better, this calculation is resulting in an adverse subsidysharing ratio. Either the ratio should be flat or a five-year term. Upstream oilcompanies bear 33 per cent of the revenue that fuel retailers lose on sellingdiesel, domestic cooking gas (LPG) and kerosene at government-controlled rates.A similar amount is contributed by the government by way of cash subsidy. Therest is either absorbed by the retailers or passed on to consumers.

Of the 33 per cent subsidy the upstreamcompanies — Oil and Natural Gas Commission, OIL and GAIL India — bear, OIL’sshare is 11 per cent or 3.3 of the gross under-recoveries. ONGC and GAIL bear82 and seven per cent, respectively. Last year, the subsidy-sharing formula forupstream companies was changed, with companies required to share the subsidybased on the last three years’ average profit ratio rather than the last oneyear’s. This was done to incentivise the efficient player. Moving from one yearto three years has resulted in OIL benefiting Rs 4,500 crore for 2010-11. LastNovember, the government had estimated Rs 1,32,000 crore as the grossunder-recovery.

Since 2006-07, the government’s share of thesubsidy burden has ranged between 45 per cent and 68 per cent; the upstream oilcompanies have borne about 33 per cent and OMCs have absorbed the remainder.However, the absence of a fixed annual sharing mechanism for under-recoveriesand the uncertain timing of cash payouts from the government adversely affectthe profitability and working capital. It expects the upstream oil companies toshare 40 per cent of the under-recoveries, Rs 56,000 crore, up from 33 per centin the past. The rising under-recoveries may push some of the OMCs into the redfor the first time in their history, as decreased profits from the refiningbusiness will not be adequate to offset their marketing losses. OIL is alsoexpecting the government to provide a minimum net realisation of around $60 perbarrel for the current financial year.

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