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ONGC, OIL risk sharing subsidy burden: Moody’s

22 May, 2018 3:52 PM
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Prior to 2015, firms had paid for more than 40% of India’s annual fuel subsidy bill

The recent rise in crude oil prices, if sustained, increases the risk that the Centre will ask state-owned Oil and Natural Gas Corp. (ONGC) and Oil India Ltd. (OIL) to share the country’s fuel-subsidy burden, according to Moody’s Investors Service.

Both firms have not contributed to fuel subsidies since June 2015, but have in previous years paid for more than 40% of India’s annual subsidy bill. Liquefied petroleum gas (LPG) and kerosene supplies consume significant subsidies in the sector.

“Because of the government’s widening fiscal deficit, ONGC and OIL could be asked to bear part of the Indian government’s fuel subsidy for oil, if prices stay above $60 per barrel for the fiscal year ending March 2019. The net impact of the subsidy sharing will be manageable for ONGC and OIL, even if the two companies are required to bear the entire shortfall between budgeted and actual amounts for the fiscal year ending March 2019,” said Vikas Halan, senior vice president at Moody’s in a report.

Moody’s estimated that fuel subsidies could total ₹34,000 crore-₹53,000 crore in fiscal 2019, the highest since fiscal 2015, assuming Brent crude oil prices average $60-$80 per barrel.

The government had budgeted for ₹25,000 crore of fuel subsidies in fiscal 2019, leaving a shortfall of ₹9,000 crore to ₹28,000 crore, which could be met by ONGC and OIL entirely, or in part, if the government increases the budget allocation for these subsidies.

Moody’s pointed out that if ONGC and OIL were obligated to contribute the entire subsidised amount exceeding the government’s budgeted figure for the fiscal year ending March 2019, such a requirement would constrain their net realised prices to $52-$56 per barrel, which is only marginally lower than or equal to the $56 for fiscal 2018.

The agency said it believed the government was unlikely to reverse fuel pricing deregulation because it remains committed to reforms. Most petroleum products are sold at market-linked prices in India, except LPG and kerosene.

Source: thehindu.com

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