ONGC, the traditional fall-back option for subsidising fuel, no longer has the financial muscle to cushion the impact of rising oil prices, company executives said amid mounting pressure on policy makers to re-impose price controls or levy a windfall tax on exploration firms.
Company executives said that in the past when ONGC was the country’s most profitable company and was virtually debt free, governments could make the explorer and Oil India Ltd bear 40% of the fuel subsidy bill by supplying crude oil to state refiners at a heavy discount to international rates when oil prices surged.
But with heavy capex plans and the acquisition of Hindustan Petroleum Corp Ltd as well as a challenging gas field of Gujarat State Petroleum Corp in the KG Basin, the company faces the risk of a rating downgrade if it is forced to borrow more to subsidise motorists, company executives said.
The government is under pressure to soften the impact of rising crude oil prices, which have risen by two-thirds in the past 11months and touched $80 per barrel, leading to a sharp increase in petrol and diesel rates. A key reason of high retail prices is that so far the government has refused to cut taxes on petrol and diesel.
These were raised sharply when international prices plunged four years ago. The sharp decline in oil prices that began in mid-2014 and deregulation of diesel had shrunk subsidy bill, but the reversal of the trend has forced policymakers to discuss options to cushion the consumers.
So far ONGC hasn’t received any directive regarding subsidy-sharing, company executives said. But if upstream players must bear subsidy, it should be shared by private oil producers as well, and not be limited to state-run ONGC or Oil India, they said. The government is considering imposing a ‘windfall tax’ on both public and private oil producers under which all incremental revenues accruing to companies at oil prices above $70 a barrel will have to be given away for fuel subsidy, news agency P TI has reported.
“Before it decides on bringing back price control or burdening upstream with fuel subsidy, the government will have to be conscious of the risk it brings to its reformist credentials,” said a sector analyst, who didn’t want to be named. ONGC has traditionally realised far less than the international rates when oil prices were high due to subsidy burden. Company executives said the company needs at least $65-70 to sustain a profitable business and carry out their capex plans.
Of every dollar of oil price realised, 55-60 cents go back to the government in the form of cess, royalty, service tax and corporate tax, the executives said. ONGC’s capex nearly trebled in a year to Rs 72,000 crore in 2017-18, most of which was spent on buying the government’s majority stake in Hindustan Petroleum and GSPC’s gas field in KG Basin. It plans to spend Rs 32,000 crore in 2018-19.
ONGC – which had been debt-free for decades, had to borrow about Rs 25,000 crore for HPCL acquisition earlier this year. “Any more borrowing to support subsidy sharing programme could deteriorate our debt-equity ratio and give rise to a rating downgrade risk,” an executive said. ONGC was once the country’s most profitable firm. But over the years its profitability has significantly eroded.
Source: Economic Times