Capex plan: ONGC is spared new impost

The government has dropped a plan to ask ONGC to resume sharing its fuel subsidy burden if the Indian basket of crude breaches $70 a barrel. An imminent reintroduction of the practice that was discontinued in FY16 was threatening to hit the state-run hydrocarbon producer’s all-important capex plans, especially since its surplus cash had got depleted by Rs 12,000 crore due to its Rs 37,000 crore acquisition of Hindustan Petroleum Corporation (HPCL) last last fiscal under a government directive.

An ONGC official told FE, “We have stated our position (that ONGC is not in a position to share the subsidy burden) and the government has understood it.”

The petroleum ministry had reportedly planned to reap a ‘windfall’ by telling ONGC and Oil India, another state-run firm, to pay a tax, probably in the form of a cess, that kicks in the moment oil prices cross $70. The Indian basket of crude oil averaged $73.47 per barrel in July 2018 and was at $69.79 per barrel on August 17, 2018. ONGC is also seeking a waiver from the twin obligations of buying back its own shares and issuing bonus shares in the current fiscal.

A zero-debt company till FY17, ONGC borrowed about Rs 25,000 crore in March 2018 to fund the purchase of 51% in HPCL while it also dipped into its reserves and surplus. After the transaction, ONGC’s surplus cash depleted to a little over Rs 1,000 crore at FY18-end from over Rs 9,500 crore at FY17-end.

During the last fiscal, ONGC also bought Gujarat State Petroleum Corporation’s entire 80% holding in the Deen Dayal West gas field in KG-OSN-2001/3 block in the Bay of Bengal for Rs 7,738 crore.

Though it has the mandate to up its oil and gas production and reduce India’s heavy import dependence for fuels, the company has been not able to increase its output significantly over the last few years. In the first round of auction of hydrocarbon fields under the Open Acreage Licensing Policy, a critical part of the March 2016-launched Hydrocarbon Exploration Licensing Policy, ONGC won just two fields out of the 37 it bid for compared with Vedanta which bagged 41 fields out of the 55 bids it put in.

Moody’s Investors Service in a note In May had expressed concerns that India’s fuel subsidy bill is set to increase with the risk of government urging the upstream companies such as ONGC and Oil India to share the burden, a practice discontinued in June 2015, and its share of subsidy burden disappeared in FY17. From nearly 60% in FY15, the share of ONGC and Oil India in petroleum subsidy declined to 10% in FY16 and further to nil in FY17. To share the subsidy burden, ONGC and Oil India used to give oil marketing companies discounts on crude oil. ONGC had borne subsidy burden of Rs 56,384 crore in FY14.

The official quoted above added that had the government asked the company to share the burden, it would have sent a wrong signal to potential investors as the government plans to disinvest part of its shareholding in ONGC and will be holding a roadshow in the US soon to gauge investor sentiment. The government disinvestment target for 2018-19 is Rs 80,000 crore, against a record Rs 1 lakh crore it achieved in the last financial year. As reported by FE earlier, the government is also exploring listing ONGC on an overseas stock exchange.

ONGC’s ‘reserves and surplus’ stood at a robust Rs 1.54 lakh crore at FY17-end, but reserves have defined end uses. Reserves consist of capital reserves, securities premium reserves, general reserves and surplus for the year. Unlike surplus, reserves are usually parked in term deposits of various maturities and current accounts, besides mutual funds. The surplus is cash and cash equivalent instruments like current and savings bank balance and liquid instruments of less than three months’ maturity.