Given his DNA, viz., “nation first”; “clarity of vision”; “decisiveness” and “firmness”, prime minister, Modi has the capacity to transform his ideas in to action in a fairly quick time frame. This is especially true of subject matters that are entirely within the executive domain.
One such subject matter relates to Oil and Natural Gas Corporation [ONGC] – a central public sector undertaking which is the single largest contributor to India’s oil and gas production and country is heavily dependent on it for taking its energy security mission forward. Modi has taken a far reaching policy decision to unshackle it from controls. Before, we dwell on the policy decision and what it has in store for the future of ONGC and India’s energy security mission, it may be worthwhile to put things in perspective.
During 2004-2014, under directions from then government, ONGC and Oil India Ltd [OIL] offered discount on supply of crude to downstream oil PSUs viz., Indian Oil Corporation [IOC], Hindustan Petroleum Corporation [HPCL] and Bharat Petroleum Corporation [BPCL] to cover a portion of under-recoveries that latter incurred on sale of LPG, kerosene, diesel [up to October, 2014] and petrol [up to June, 2010] at prices below cost of production [Gas Authority of India Limited (GAIL) – another upstream PSU in the business of transportation and marketing of gas and has nothing to do with supply of crude was also ordered to meet a portion of under-recovery].
The percentage sharing of burden by ONGC/OIL/GAIL varied from year-to-year and reached to more than 50% during 2013-14 in total under-recovery of Rs 139,000 crores. Till 2013-14, ONGC alone had cumulatively contributed a total of around Rs 273,000 crores towards under-recoveries of oil PSUs. During first three quarters of 2014-15, it contributed Rs 36,000 crores [during last Qr however, it was exempt from sharing the burden] taking grand total to Rs 309,000 crores. There could not be more glaring example of a PSU being used as a ‘milch cow’ to support government’s largesse.
This is particularly galling when seen in the backdrop of a decision taken by NDA government under Vajpayee in 2002-03 to dismantle administered price regime [APR] for petroleum products and making the subsidies on diesel, LPG and kerosene transparent by taking these on government’s books [under APR dispensation, these were opaque and cross-subsidized by charging higher than market/cost-based price on other products like naphtha, fuel oil, LSHS (low sulphur heavy stock) and ATF (aviation turbine fuel)].
The motive of Vajpayee to make subsidies transparent was to constantly remind the ruling establishment to take steps for eliminating these in a calibrated manner. Instead of following this desired trajectory, UPA indulged in skulduggery; forget steps to reduce subsidy which continued to increase leaps and bounds, it made the system even more opaque. It used [shall we say, mis-used] government’s exclusive ownership and control over ONGC/OIL/GAIL to make them pay for the under-recoveries!
Whereas, under APR, at least PSUs were not put to a loss as there was cross-subsidization from sale of high end products like ATF etc, from 2004 onward, upstream oil & gas PSUs were being denuded. When, ONGC needed mammoth resources to fund its investment in exploration and development of fields [ about Rs 30,000 crores annually in recent times], it was milched dry only to meet government’s revenue expenses on subsidies. Due to this arrangement, ONGC also suffered a collateral damage.
According to Oil Field Act (OFA), ONGC is required to pay royalty @ 20% on market value of crude oil it extracts from oil blocks/fields to state government. Because of discount, while ONGC was getting less, Gujarat government insisted on royalty payment on pre-discount price. Between October 2003 and March 2008, ONGC obliged, but thereafter under directions from centre, it started paying royalty on price net of discount. The state filed an appeal against this in Gujarat High Court (GHC) which allowed its demand for royalty even on the discount. As result, ONGC is saddled with a huge liability of Rs 10,000 crores for the period 2008-2013!
Thanks to aforementioned un-interrupted plunder of its internal resources, ONGC has also lost heavily in market perception. An idea of this can be gauged from the following. Last year, the government had aimed at garnering about Rs 18,000 crores from divestment of 5% its shares but was forced to drop. The overriding reason for this was steep decline in market price of its share from Rs 472 in June, 2014 to Rs 320 in March, 2015 due to lukewarm investor’s perception. In the road shows held in November, 2014, foreign investors shared their discomfiture over the policy of sharing under-recoveries.
The extant system of sharing was opaque and un-predictable. As per a formula used in 2013, discount was fixed at US$ 56 per barrel irrespective of prevailing crude price. This meant that even at a high of US$ 100 per barrel, ONGC net-back would be US$ 44 per barrel barely sufficient to cover its production cost. At US$ 50 per barrel [in March, 2015, price had plummeted to this level], we have a patently absurd situation whereby, it would have to give US$ 6 per barrel in addition to ‘free’ supply to downstream oil PSUs!
In sharp contrast, Modi – government first decided not to ask ONGC/OIL to contribute any amount towards under-recoveries during January – March, 2015. From fiscal 2015-16 onward, it has now come out with a clear-cut and definitive policy regarding sharing of the burden. Thus, for price of crude up to US$ 60 per barrel, they need not give any discount. For price in US$ 60-100 per barrel range, the discount will be @85% of incremental price and for above US$ 100 per barrel, it will be @90% of incremental price.
At average price of around US$ 62 per barrel during April-June, 2015 [for Indian basket], ONGC/OIL will have to shell out a negligible discount of US$ 1.7 per barrel [2×0.85] as against discount of US$ 56 per barrel if earlier formula were to continue. In absolute terms, ONGC will have to shell out only Rs 670 crores during this quarter against Rs 13,200 crores given during April–June, 2014. Likewise, OIL will give a pittance about Rs 50 crores during April – June, 2015 down from Rs 1850 crores during April–June, 2014.
One may argue that with big drop in crude prices, under-recoveries have drastically decreased. So, what is so great about not burdening upstream PSUs at all? Notwithstanding decline in crude price, the importance of policy reforms cannot be wished away. In this regard, decontrol of diesel from November 1, 2014 and direct benefit transfer [DBT] of LPG from January 1, 2015 meant that IOC/BPCL/HPCL would sell these products at market price; hence no under-recoveries and in turn, no question of sharing burden with ONGC/OIL.
Only in case of kerosene, where IOC/BPCL/HPCL continue to sell at low price resulting in under-recovery [estimated to be Rs 13,000 crores during current fiscal], there is a possibility of ONGC/OIL being asked to share some burden. Herein also, the formula approved by Modi – government [especially, no discount for crude price up to US$ 60 per barrel] will ensure that the expected contribution from latter would be negligible.
Given the global demand-supply scenario, it is most unlikely that crude price will go beyond US$ 60-65 per barrel range. Even if it does, ONGC does not have much to loose as with production cost @ US$ 40 per barrel, it will have a guaranteed surplus of US$ 20 per barrel or US$ 140 per ton [1 ton = 7 barrels]. On crude production of around 22 million tons per annum, this will yield surplus of US$ 3080 million or around Rs 20,000 crores per annum.
Clearly, under the new dispensation, ONGC/OIL will be able to generate enough internal resources to meet their investment requirements for exploration & development and thus vigorously pursue India’s energy security mission. Meanwhile, with no [or negligible] discount, the problem of royalty will also be automatically taken care. However, the government must continue to pursue in the apex court pending liability of Rs 10,000 crores to get a decision in ONGC’s favour as logically, royalty cannot be paid on an amount not realized by the company. For details, pl read:-
In view of Modi – government putting in place a predictable and conducive policy regime for sharing of subsidy burden indeed, reducing it drastically during 2015-16 [and even beyond] thereby putting ONGC/OIL on sound financial footing, a stage is set for garnering sumptuous proceeds from proposed divestment of 5% and 10% shareholding respectively in these companies.
This will go a long way in meeting the overall target of mobilizing Rs 41,000 crores by way stake sale in PSUs.