IOC’s optics, ONGC’s reality

While IOC is reaping undue benefits from the subsidy burden regime, ONGC finds itself at the receiving end

Noor Mohammad, New Delhi, Hardnews

The government had put in place the existing subsidy burden-sharing regime for the petroleum sector as a strategy to cushion domestic fuel consumers from the impact of rising prices of crude oil in the international market. But while global crude oil prices have since plummeted, subsidy burden-sharing regime is still in place, allowing oil marketing companies (OMCs) such as Indian Oil (IOC) to thrive at the cost of upstream companies like ONGC. This does not gel with the government's strategy to achieve long-term energy security.

This is clear from the fact that despite a sharp decline in its gross refining margin, IOC has reported 42 per cent higher net profit for the third quarter of the current financial year, compared with the corresponding period of the past fiscal. Its net profit for the latest quarter was pegged at Rs 2,959 crore as against Rs 2,091 crore reported for the same quarter of the previous year.

IOC's gross refining margin has dropped by as much as $6 per barrel in this period. The company has attributed the sharp drop in the refining margin to higher inventory losses arising from the fall in international prices of crude oil.

On the other hand, ONGC's net profit in the latest quarter slumped 43 per cent to Rs 2,475 crore. The upstream company paid Rs 4,899 crore towards its subsidy-sharing obligation in the form of discounts on sale of crude oil to OMCs even as it faced declining revenues.

The mystery of the hefty growth in the IOC's net profit for the latest quarter in the face of declining refining is not difficult to understand if we look into the import duty structure for the petroleum sector. Presently, import duty on petrol and diesel is 5 per cent while duty on crude oil is nil. And since the current pricing regime for petroleum products is based on trade parity (a mix of 80 per cent import price and 20 per cent export price), this 5 per cent differential translates into higher under-recoveries for OMCs.

Besides, in the wake of the precipitous fall in international prices of crude oil, IOC is also making decent profits on the retail sale of petrol and diesel but still claiming discounts on purchase of crude oil from ONGC on account of under-recoveries incurred by it earlier. So while IOC is reaping undue benefits from the subsidy burden regime, ONGC finds itself at the receiving end.

This is obviously an anomalous situation given that investment risks in exploration are much higher compared to refining. And with international crude prices in the doldrums, attracting private investments in exploration is going to be even more difficult. However, the country can still bank on ONGC for undertaking high-risk exploration activities.

Hardnews argues, Under these circumstances, allowing OMCs to thrive at the cost of ONGC does not make sense. Rather, it could have serious repercussions on the long-term energy security of the country. It is high time the government started review of the subsidy burden-sharing dispensation in the overall interest of the country.