In an unprecedented move rarely seen in the financial history of independent India, the government has exonerated its undertakings in the oil sector viz. Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL] from a potential liability of about Rs 22,000 crore in royalty dues to states of Gujarat and Assam.
ONGC had to pay Gujarat Rs 8,392 crore and Assam Rs 1,404 crore in royalties for the period between April 1, 2008 and January 2014. Together with interest Rs 2,868 crore, total liability was Rs 12,664 crores. OIL had to pay to Assam government Rs 4,902 crore in royalty dues plus Rs 4,355 crore in interest adding to Rs 9257 crore.
Union government has settled this pending liability of ONGC and OIL by paying the royalty amount Rs 14,698 crore directly to the governments of Gujarat and Assam who won’t insist on levy of Rs 7,223 crore interest for the mentioned period.
This benevolence showered on ONGC/OIL stands in sharp contrast to their continuous plunder by successive political establishments in the past in a variety of ways viz. dividend/special dividend, buy-back of shares, sale of crude oil to downstream state oil marketing companies at discount etc if only to meet the burgeoning fiscal deficit of central government.
To put things in perspective, some basic facts are in order. Until the dawn of the 21st century, petroleum products in India were covered under an administered price regime (APR).
Downstream oil PSUs, viz. Indian Oil Corporation, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd were required to sell diesel, kerosene and LPG at prices below the cost of production and distribution—apart from this, till 1997-98, supplies of naphtha, fuel oil and low sulphur heavy stock (LSHS) to fertiliser industry were also made at ‘concessional’ price.
The losses on sale of these products were cross-subsidised by surpluses generated from sale of naphtha, fuel oil, LSHS, aviation turbine fuel (ATF) to other industries at prices much higher than costs.
These inflows and outflows were administered through the Oil Pool Account (OPA). Depending on the international price of crude versus price matrix of various products, OPA ran in to net surpluses or deficit at different points of time.
In 2002-03, based on recommendations of Vijay Kelkar Committee, the NDA [National Democratic Alliance] government dismantled APR. Even as it continued the sale of diesel, kerosene and LPG at low prices, it bowed to the pressure of paying subsidies ‘directly’ from the Union budget. The objective was to make these subsidies ‘transparent’ and ‘focused’. This was also a precursor to a phased program for progressive elimination in a time bound manner. But, this euphoria was short-lived.
The new government under UPA [United Progressive Alliance] was never serious about reducing subsidies. Yet, it was keen on avoiding stress on the budget. Therefore, it came up with the ingenious idea of directing ONGC and OIL to offer discount on supply of crude to downstream oil PSUs. Accordingly, ONGC/OIL started giving discount from 2003-04, a policy which continued till the first half of 2015-16.
According to the Oil Field Act (OFA), ONGC/OIL are required to pay a royalty of 20% on the market value of the crude oil they extract from oil blocks/fields to the state in which oil is produced. Initially, the former paid royalty to latter on pre-discount sale price till March 31, 2008. From April 1, 2008, however under instructions from oil ministry, this was paid on post-discount sale price.
For a couple of years, Gujarat government accepted payments on the above basis. However, in 2011, it started insisting payment on the pre-discount price and filed a writ petition in Gujarat High Court [GHC]. GHC accepted state’s contention and vide its November 2013 order, directed ONGC to pay royalty on pre-discount price.
ONGC challenged the decision in Supreme Court [SC] which in February 2014 granted stay against the order of GHC on the condition that ONGC will pay royalty to Gujarat on pre-discounted price of crude oil with effect from February 1, 2014. In the meanwhile, the Government of Assam had also taken up the same matter in Gauhati High Court.
In this backdrop, Government of India [GOI] volunteered to pay the arrears for past period April 1, 2008 to February 1, 2014 directly to the concerned states [for the period thereafter, ONGC anyway was paying to Gujarat on pre-discount price as per SC interim order]. Pursuant to this, SC disposed off the case on February 20, 2017.
Without doubt, Modi – dispensation has injected an air of freshness in the way PSUs are managed. In the instant case, apart from exonerating ONGC and OIL of the mammoth royalty liability, it has also taken yet another bold step of freeing them from the burden of giving discount on their sale of crude to downstream oil PSUs from 2016-17.
In the past, due to this factor alone, ONGC had faced substantial deterioration in its internal finances [during 2004-2014, it made a cumulative contribution of over Rs 216,000 crores by way of discount on crude sale]. As a result, at one point March 31, 2013, its cash balances had plummeted to a low of Rs 6000 crores as against its capital expenditure requirement of Rs 35,000 crores annually.
By unshackling this ‘NAVRATNA’ undertaking from the perennial discount liability, Team Modi has taken a big step forward in boosting its internal resource capability. This is more so at a time when, it has to fund its massive investment plans for exploration and development of oil and gas fields in India’s drive for increasing indigenous production of hydrocarbons for enhancing energy security.
In the budget for 2017-18, finance minister, Arun Jaitely has alluded to creating 2 or 3 integrated oil and gas companies – from amongst the oil PSUs – which can compete with global energy majors. In this big leap forward, ONGC and OIL will have to play a major role. From this perspective also, it is imperative that these companies are kept healthy and robust.
It is indeed heartening to see perfect synchronization between sector specific policy initiatives with macro-economic goals such as energy security unlike the past when invariably, the right hand won’t know what the left hand did.