With global crude prices having come down to $69 per barrel, and petrol as well as diesel prices now deregulated, the Government is now looking to fix the subsidy amount of ‘aam admi’ fuels like lPG and kerosene.
A cabinet note has been formulated by the Petroleum Ministry, seeking to fix the subsidy amount on lPG (cooking gas) and kerosene, the only two fuels which are under Government’s control.
Sources privy to the development told The Pioneer that the idea behind the move is to lessen the subsidy burden on upstream companies like ONGC and Oil India ltd (OIl) so that they get more financial flexibility to spend on the development of high cost oil fields.
The Cabinet note, sources said, has recently been floated and taking into consideration the downward spiral in international crude prices, the subsidy amounts are likely to be fixed soon.
The Government is keen to fix the subsidy sharing formula, as ONGC’s much awaited disinvestment programme also hinges on how much subsidy burden will the Maharatna company have to shoulder on sale of lPG and kerosene for the remaining two quarters of the current financial year. It has already made the subsidy payments to the Government for the first two quarters of FY15.
Diesel prices were deregulated by the Government in October this year, while petrol prices were freed in 2010. While traditionally crude prices are dearer globally (they hover in the range of $115 to $120 per barrel under normal circumstances), ONGC has to share the subsidy burden of the Government by selling it to downstream companies like Indian Oil Corporation (IOC) and others at less than market price.
For example, according to the subsidy-sharing mechanism, which was in place till the end of the second quarter of the current fiscal, ONGC gave a discount of $56 per barrel while selling crude to oil marketing companies (OMCs) to partly compensate them for the losses they make on selling fuel below market price. This amount was arrived upon as till the second quarter (which ended on September 30, 2014), the average price of global crude was $112 per barrel.
Though the recent decontrol of petrol and diesel has reduced OMCs’ under-recoveries, the Government is yet to decide on the subsidy sharing mechanism for the remaining two quarters of the current fiscal for ONGC. It is for this purpose therefore that the cabinet note has been moved to fix the subsidy amount for lPG and kerosene at the earliest.
While the subsidy sharing mechanism between Government and ONGC also needs to be thrashed to pave the way for the upstream company’s divestment, another significant reason is that with crude prices having come down to $69 per barrel, it will become difficult for ONGC and OIl to share the subsidy burden. The existing formula of $56 per barrel will not be practical anymore under the changed circumstances as there will be immense financial burden on the two companies to implement it.
Therefore sources said that all these aspects will be kept in mind while fixing subsidy amount on lPG and kerosene so that ONGC and to a lesser extent OIl get enough legroom to divert their finances towards developing some of their high cost oilfields which require urgent attention.