The Telegraph
Since 1st March, 1999
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Bailout bill rises for oil duo

New Delhi, Aug. 14: The petroleum ministry plans to ask the Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) for more money to bail out Indian Oil, Bharat Petroleum, Hindustan Petroleum and IBP. The oil marketing companies have plunged into the red as they have been forced to sell their products at rates much lower than the sky-high global cost of crude.

The move is part of a policy of undeclared ‘cross-subsidisation’ where the exact amount the two cash-rich firms pay will be worked out after totalling the losses suffered by retailers.

The oil marketing firms have lost more than Rs 9,700 crore in revenues this fiscal because of a freeze on retail prices. They are losing Rs 3.63 per litre on petrol sales and Rs 4.15 per litre on diesel. Liquefied petroleum gas is being sold at a loss of Rs 92 per cylinder and kerosene at a loss of Rs 11 per litre.

However, the move jeopardises Prime Minister Manmohan Singh’s plan to step up oil and gas field acquisition abroad. Since ONGC spearheads the overseas forays to acquire hydrocarbon assets, lower funds will weaken its ability to pick up foreign oil equity.

The government is also lining up OIL, backed by Indian Oil, as the second company to pick up stakes in oil and gas fields abroad. However, Indian Oil is reeling under losses and is hardly in a position to bankroll foreign acquisitions.

With crude prices scaling a peak of $67 per barrel, the amount required for a stake in an oil or gas field abroad will also go up. Indian firms will, therefore, find themselves in a situation where they will try to pick up more expensive hydrocarbon assets with depleted financial muscle.

Riding on the back of soaring crude prices, ONGC has clocked a net profit of Rs 12,983 crore in 2004-05, a 50 per cent increase over Rs 8,664 in 2003-04.

The profit would have been higher if the company did not have to share Rs 4,104 crore worth of LPG and kerosene subsidies. The two fuels are sold by marketing companies.

The petroleum ministry feels that ONGC’s share of the subsidy burden can be increased as the downstream companies are piling up losses. However, the increased outgo from ONGC's coffers would reduce the funds available for investments abroad.

ONGC, through its foreign arm ONGC-Videsh, has been able to strike good deals in Russia, where it picked up a stake in the giant Sakhalin oilfield. But this was at a time when the Russian economy was in bad shape and Moscow needed money.

The economic scenario in Russia has now improved to a level where it exports large quantities of crude at high prices.

When OVL made an attempt to buy a stake in the Yukos oilfield, it offered around $3 billion for a 15 per cent share whereas the Russians were expecting $7.6 billion. The Chinese National Oil Co was willing to extend the amount as a loan, in return for an assured supply of oil. This was a better proposition than the Indian offer for an outright purchase.

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