Lower Subsidy Share Of Upstream Companies May Offset The Negative
MUMBAI: A good Budget’s rating typically depends on how uniformly it makes people unhappy. Finance Minister Pranab Mukherjee has achieved this feat. Just weeks before the FM presented the Budget, shares of Cairn, ONGC and Oil India Limited (OIL) were on the uptick as higher oil prices meant better realisations.
The FM seemingly wanted a share of the pie. He has increased the cess on crude from Rs 2,500 a tonne to Rs 4,500 a tonne. This effectively means a decline of $5 a barrel in crude oil realisation. While this will add Rs 7,500-8,000 crore to the government’s kitty, the cess will negatively impact earnings of companies like ONGC, OIL and Cairn. According to Deutsche Bank, “The increase in cess on crude oil by 80 per cent will negatively impact all producing crude oil in India. We estimate the negative impact on earnings at 15 per cent for Oil India, nine per cent for ONGC and seven per cent for Cairn India.”
However, the impact on upstream oil companies (OIL and ONGC) changes if one adds up the amount the government will pay these companies for under-recoveries. In the 2011 Budget, the subsidy provided for FY12 was Rs 20,000 crore, which actually pertained to the payments to be made to oil companies for the fourth quarter of FY11. The actual provision for subsidy was zero in FY12, claim analysts. Similarly, the Rs 43,800 crore provided as fuel subsidies in the FY13 Budget also pertains to the payout to oil marketing companies in just Q4 FY12. According to analysts at the Royal Bank of Scotland, “In the first nine months of FY12, the government subsidy to the OMCs was Rs 45,000 crore and, hence the revised provision for FY12 in the Budget is Rs 65,000 crore (old provision of Rs 20,000 crore + Rs 45,000 crore actually intimated to OMCs). Thus, the actual government subsidy for FY12 would be Rs 85,000 crore (Rs 45,000 crore already given for first nine months, plus Rs 40,000 crore provided in this Budget).” Analysts estimate the subsidy share of upstream companies would come to 38-39 per cent, which is slightly lower than the earlier estimate of 40 per cent.
So, the new cess will only take away from the upstream players gains of higher crude oil prices. But, if downstream companies are not able to absorb the subsidy burden, OIL and ONGC may have to take a higher share. That may be a bigger negative. Analysts say the higher subsidy burden and lack of deregulation in diesel and LPG prices may continue to be an overhang for state-owned oil companies. However, if globally oil prices fall or domestic prices are increased sharply, then the picture could change.