MUMBAI: State-run Oil and Natural Gas Corporation (ONGC) will be among the biggest losers from the budget proposals as the company, already hit by forced discounts it has to offer refiners, will take a hit of up to Rs 5,000 crore from the finance minister’s proposal to raise the cess on crude oil by 80%.
The cess was revised six years ago and fixed at Rs 2,500 per tonne. “This rate was last revised in the budget 2006-07. As a measure of indexation, I propose to increase the rate of cess to Rs 4,500 per tonne,” said finance minister Pranab Mukherjee while announcing the Union budget last week.
The unexpected announcement, that hurts ONGC and Oil India, and possibly Cairn India also, led to a 5% fall in the shares on Friday. Senior industry analysts see this news as directly hitting the overall profitability of ONGC by Rs 3,000-5,000 crore and Cairn India could see its PAT impacted by Rs 950-1,000 crore. Company executives see this as a major deal-breaker as they believe this will negatively impact overall exploration activity across the country.
Manu Kapoor, Director, Communication, Cairn India told ET, “We are looking at all our options. There are terms and provisions in the PSC, including the Fiscal Stability clause. We are currently examining these existing provisions and understand how they would apply in this case.”
Industry officials said the move would discourage exploration. “This is a very unfair move, it’s almost like domestic producers of oil are being penalised and this will definitely impact the overall intent of companies to invest in exploration activities across India which is critical for the country’s energy security given that our crude import bill is up by 50% this fiscal,” said a senior industry source.
Industry experts say that back-of-the-envelop calculations indicate that Rs 2,500 cess per tonne resulted in a net payment of $7-7.5 per barrel of crude oil extracted now that outgo will shoot up to $15 per barrel. For ONGC, the unexpected increase in cess, along with its rising subsidy share burden, would severely hurt its profitability.
“The impact on ONGC’s financials could be significant especially as going ahead it’s clear that its subsidy burden is only going to increase given the recent volatility in international crude prices which fuel retailers will not be able to bear and also the government’s own fiscal conditional does not really allow it to shell out huge subsidies so a greater onus will fall on ONGC next fiscal,” said RS Sharma, ex-CMD, ONGC.
“This is a major unexpected shocker for ONGC and the net cess increase is actually Rs 4,525 (per tonne) as you have to add the additional educational cess payments, this could impact ONGC’s revenues by Rs 5,000 crore , also given the increase in service tax payments ONGC could also take another hit of Rs 300 crore,” he said.
The Iran crisis has pushed Brent crude above $125 a barrel, and India’s average import price crude basket to $118, raising the losses of state refiners and the consequent subsidy burden on ONGC.
Industry experts expect upstream firms’ share of subsidy to increase in the quarter ending March 2012. Earlier their share for the nine months ended December 2011 was raised to 38% from 33% for the half year ended September. This pushed up the subsidy share in the December quarter to 47%, or Rs 15,261 crore. ONGC’s subsidy burden in the December quarter stood at Rs 12,536 crore.
Higher subsidy affected the company’s net realisation for the December quarter, which fell to $44.96 (around Rs 2,208 on Monday) per barrel from as high as $83.01 in the September quarter and $64.79 in the same period last year.
Elara Securities said in a recent report: “We expect an even higher upstream subsidy in Q4 FY12 (quarter ending March 2012), in the range of 52-55%, and the annual FY12 upstream burden to be at around 42%. Based on this, ONGC’s Q4FY12 subsidy may reach $80-85 per barrel, building up further pessimism around the earnings delivery.
“In case the government does not deregulate diesel prices immediately going-ahead, we expect ONGC’s subsidy burden to go up from 38% to 42-45% and the recent cess hike will affect its earnings per share by Rs 2-3, the market will continue to view the stock negatively,” saidDeven Choksey,MD, KR Choksey securities. ONGC did not respond to ET’s email query.