Date:15/11/2005 URL: http://www.thehindubusinessline.com/2005/11/15/stories/2005111503250200.htm

Back ONGC to seek cut in subsidy burden — To avoid negative impact on profitability

Pratim Ranjan Bose

Kolkata , Nov. 14

EXPLORATION and production major, ONGC, is expecting a reduction in its subsidy burden beginning third quarter to beat the negative impact on its profitability due to reduction in crude prices.

Crude oil prices for December delivery registered a 14-week low at $57.53 a barrel on the New York Mercantile Exchange on Thursday. Overall prices have dropped 19 per cent since reaching a record $70.85 on August 30. More importantly, the inventory position and the weather conditions in the Northern Hemisphere suggest that prices are unlikely to move up in the coming months.

While fall in profits from operations and increase in pay-back from investments is part of the business nature in the oil industry, the company's biggest woe is the subsidy burden it was asked to share through price discounts during the last three years.

According to a senior company official, ONGC's profit is impacted by Rs 820 crore (either way) for every $ price variation (beyond $30 a barrel) of crude oil. During the last few years when prices were on an uptrend, on an average, 40 per cent of the total gain from price variation was taken away by the Centre as subsidies.

This is in addition to the taxes and duties payable to the exchequer. Since prices were on an upswing, the company's net profit swelled even after such large payouts especially during the last two years.

As prices are on a downswing now, the company is expecting lower returns from sale of crude oil especially in the fourth quarter. The overall impact on profitability will be higher if ONGC continues to share such high subsidy burden even on a falling price regime.

"We shelled out heavy subsidies when crude prices were on an uptrend. Similarly, when crude prices are falling, subsidies should come down," the official said adding that the company is set to make a fresh plea to the Centre for reduction in subsidy burden from third quarter onwards.

ONGC has already paid over Rs 5,700-crore subsidies in last two quarters. The average price discounts offered to OMCs during the first half of 2005-06 was to the tune of $18-19 per barrel.

"Considering price discounts, payment of cess (Rs 1,800 per tonne), royalty, National Calamity Fund (Rs 50 per tonne) and other taxes and duties, we now break even at $45 a barrel," says a company insider.

"We had to take it in our stride till oil prices were ruling high. Now that there are signs of a correction in prices there should be an immediate correction in burden put on us."