Narendra Modi govt puts hefty $1 bn burden on ONGC, Oil India

Government-owned explorers ONGC and Oil India face an additional royalty burden of more than $1 billion after the Narendra Modi government decided that they would have to pay royalty to crude oil-producing states such as Assam, Gujarat, Andhra Pradesh, Rajasthan and Tamil Nadu at ‘pre-discount’ rates.

“It has been decided that ONGC and Oil India will pay royalty to all similarly placed crude oil-producing states at pre-discount prices effective February 1, 2014, pending the outcome of the special leave appeal filed by ONGC before the Supreme Court,” said a petroleum ministry order dated July 15.

This means ONGC and Oil India would have to pay royalty to the states based on their gross realisation on sale of crude oil and not on the net price. This is despite the fact that the shift from gross to net price for royalty was made in 2008, in concurrence with the petroleum ministry. The difference between the gross and net price is the subsidy burden borne by these upstream companies to compensate state-run IOC, HPCL and BPCL for selling sensitive petroleum products below market cost. Though the exact additional burdens on ONGC and Oil India because of the ministry’s stance are not immediately known, officials say their combined additional payout would be $1 billion.

DK Sarraf, chairman and managing director, and AK Srinivasan, director (finance) at ONGC, could not be reached for comments, as both are travelling overseas.

Thanks to the drastic fall in global crude oil price that reduced India’s oil subsidy substantially, in FY16, ONGC reported gross realisation of $48.26/barrel. After forking out for subsidy at $1.12/barrel, its net realisation stood at $47.14/barrel. In FY15, ONGC gross realisation was $85.28/barrel and after sharing $40.41/barrel towards subsidy, its net realisation dropped to $44.87/barrel. “We have decided Assam and oil-producing states will get additional royalty from ONGC and Oil India. Assam might get above R1,400 crore,” said petroleum minister Dharmendra Pradhan.

ONGC and Gujarat are embroiled in a legal tussle over the calculation of royalty payments. In November 2013, the Gujarat High Court ordered ONGC to pay R10,000 crore dues to the state till September 2013 to make up for the royalty dues.

The ‘maharatna’ PSU appealed in the Supreme Court against the Gujarat HC order and on February 13, 2014, the apex court stayed the high court order, but told ONGC to pay royalty at the pre-discount price starting February.

In October 2003, upstream companies were directed to make good a part of the under-recoveries of oil-marketing companies.

However, the Centre initially said the revenue of states in terms of royalty should not be affected by the discount offered to OMCs. Based on this direction, ONGC from April 2003 started paying royalty to the Centre for its offshore fields at the post-discount price, while for onshore fields it paid royalty on the pre-discount price.

But ONGC realised that royalty payments to the states were in excess of the statutory limit of 20% of the price realised by the company, as mentioned in the Oilfields (Regulation and Development) Act of 1948, and in 2008 got the oil ministry agree to the shift towards net price for royalty to states.