Government moves to ‘rationalise’ ONGC, OIL subsidy burden

While there is no move yet to deregulate diesel prices, the petroleum ministry proposes to rationalise the subsidy-sharing mechanism for state-run oil producers, which would reduce the burden on Oil & Natural Gas Corp and Oil India Ltd as well as increase income for oil-producing states such as Gujarat and Assam.

Sources said the ministry proposes to consider the OID (oil industry development) cess paid by ONGC and OIL as part of their subsidy share. In return, the companies would pay royalty to states on the full price of crude and not the discounted rate offered to government refiners.

The twin measures would ensure a predictable return for the oil producers and help them plan their investment for exploration. The move on royalty would remove a major cause of legal dispute with oil producers.

ONGC and OIL give discounts to help state refiners cover part of their losses from selling diesel and cooking fuels at government-capped rates. Over the years, this discount has risen from 30 per cent in 2008-09 to 48 per cent in 2013-14.

According to the most recent reckoning, the discount stood at $56 on a barrel of crude. In addition, the producers also paid $18-19 as Central and state levies on each barrel of oil. Against a minimum return of $65 a barrel required to provide money for future exploration, the companies have been getting only $31 on a price of $105 per barrel.

The companies also pay Rs4,500 and Rs900 per tonne as OID cess for oil produced from pre-NELP exploration blocks and pre-NELP discovered fields, respectively. Since 1974-75, the Centre has mopped up Rs118,507 crore from this cess but has only transferred Rs902 crore to Oil Industries Development Board, the custodian.

Since the government is apparently using this money to plug fiscal deficit or pay subsidy, there is enough rationale to consider the cess as subsidy share from producers.

The proposal on state royalty cess has been prompted by the Gujarat government's demand for calculating the levy at full price, instead of the discounted price of oil produced from the state. The state moved the Gujarat High Court and won its argument.

ONGC thereupon moved the Supreme Court, which stayed the high court order but asked ONGC to pay royalty at pre-discount price till the case is decided. Taking a cue from Gujarat, the Assam government too has written to the Centre seeking royalty on pre-discount price. Oil producers pay royalty at the rate 20 per cent of the crude price.