Awaiting solution

New Delhi, July 3: State-owned explorer ONGC, which plans to launch a follow-on public offer later this month, has sought transparency in the subsidy-sharing mechanism.

Under the subsidy-sharing mechanism, upstream oil firms — ONGC, Oil India and GAIL — have to share the under-recoveries of PSU oil retailers from selling fuel below cost.

“If the formula of passing on one-third of the under-recovery to upstream companies is continued during 2011-12 when crude prices are likely to remain over $100 per barrel, it will have a serious impact on the profitability and cash flow of upstream companies,” ONGC chairman and managing director A.K. Hazarika has written to oil secretary G.C. Chaturvedi.

He said the company was ready for the share sale but would like to have “more clarity” on the subsidy sharing formula for the current fiscal.

Despite the hike in fuel prices and the duty cuts, the under-recoveries for 2011-12 are estimated at around Rs 1,20,000 crore because of the spike in global crude rates.

At $100 per barrel crude, upstream companies will have to contribute Rs 45,150 crore as subsidy, of which ONGC will have to chip in with Rs 37,096 crore. The subsidy burden for upstream firms was increased to 38.5 per cent of the total under-recoveries for 2010-11 against 33 per cent earlier.

Analysts said the decision to hike fuel prices and ONGC’s proposed FPO had raised the hopes of the government coming up with “some predictable subsidy sharing mechanism”.

The government plans to raise Rs 13,000 crore by selling a 5 per cent stake in ONGC. After the offer, the government’s stake in the PSU will come down to 69.14 per cent from 74.14 per cent.

As an alternative to the subsidy sharing formula, Hazarika suggested that the government impose a special oil tax or windfall tax to take 20-80 per cent of the incremental revenues accruing over and above the crude oil price of $60 per barrel.

ONGC’s suggestion stems from a recommendation of the Kirit Parikh committee on financing the under-recoveries of oil marketing companies.

Tax formula

The report had suggested mopping up of a portion of the incremental revenue accruing to ONGC and Oil India from production in the nominated blocks at the rate of 20 per cent (for crude price at $60-70 per barrel), 40 per cent ($70-80 per barrel crude), 60 per cent ($80-90 per barrel crude) and 80 per cent (for crude above $90 per barrel). Upstream firms contributed Rs 30,297 crore of the total revenue loss of Rs 78,189 crore in the 2010-11 fiscal.

During the first quarter of the current fiscal, upstream firms may have to provide Rs 14,446 crore to compensate for the retailers’ losses. Of this, ONGC may have to contribute Rs 12,123 crore, Oil India Rs 1,640 crore and GAIL, Rs 683 crore.

GAIL (India) had recently said it should be kept out of the subsidy-sharing process as it was a gas transporting firm and did not benefit from a crude price hike.