Wednesday, May 6, 2015

Rising crude could leave Rs 14,000 cr shortfall in govt's petroleum subsidy payout

With the global crude oil price benchmark Brent rising to a new 2015 high of over $68 per barrel on Wednesday on the back of disruption in exports from Libya, the government's petroleum subsidy calculation is set to be impacted by upto Rs 14,000 crore if the high prices are sustained at current levels.

Analysts estimate that at an average $70 per barrel level of crude oil prices for 2015-16, the Oil Marketing Companies (OMCs) Gross Under-Recoveries would stand at Rs 46,000 crore. "Add to it Rs 8,000 crore carry-over of the fourth quarter subsidy from last fiscal and the total petroleum subsidy requirement for the current fiscal goes up to 54,000 crore. This translates into a shortfall of Rs 14,000 crore against the revised budgeted petroleum subsidy of Rs 40,000 crore, as per our calculation," said K Ravichandran, Senior Vice President and Co-Head of Corporate Sector Ratings at ratings agency ICRA. The government's subsidy estimate was based on an assumption of crude oil price at $70 per barrel.

He added that the calculation takes into account the subsidy savings accruing from the Modified Direct Benefit Transfer in Liquefied Petroleum gas (LPG). He said at this level of shortfall in petroleum subsidy estimate, the government may have to again ask upstream firms to share subsidy burden. "It seems unlikely that the government would allow the upstream firms to retain the bonanza they will enjoy from $70 per barrel crude oil price."

The current level of crude prices of $68 per barrel is a 44% increase over the January low of $49 per barrel. The crude price hike bodes well for upstream firms like Oil and Natural gas Corporation (ONGC) who would benefit from higher realizations and the government's recent decision to exempt them from subsidy burden sharing. "ONGC's arm Oil Videsh Ltd (OVL) will be particularly benefitted," he said, adding that downstream firms like Indian Oil (IOC) would benefit significantly due to the inventory gains resulting from higher crude rates.

Ravichandran, however, said the latest rise in crude oil price may not last long as the global markets for oil are well supplied and the US shale oil production has not slowed down materially. In addition, the recent Iran nuclear deal, when finalized, may lead to increased supplies.

Another analyst, India Ratings' Director-Corporates Salil Garg, said it may be too early to presume global crude oil price will average at around $70 per barrel or $80 per barrel given the uncertainty over multiple issues impacting the prices - US shale output would start flowing again at $65 per barrel, the geo-political issues involving Yeman and Libya may be short-lived and OPEC may not act to cut supplies.

"In case prices average at around $70 per barrel for long, the government would have three options before it - asking upstream firms to shoulder the burden, loading consumers like non-subsidized LPG users with higher prices and revising the budgetary estimate of petroleum subsidy further," he said.

In 2013-14, when the Indian basket of crude oil price averaged at $105 per barrel, OMCs GURs on subsidized sales stood at 139,000 crore, including Rs 62,000 crore losses on diesel, Rs 46,000 crore on cooking gas and Rs 30,000 crore lost on Kerosene sales below cost of supply. Of the total GURs, the government had to shoulder the burden by Rs 70,000 crore (50%) while the upstream firms had to bear a burden of Rs 67,000 crore (48%).

In 2014-15, the Indian basket of crude oil price averaged at $89 per barrel and the OMCs suffered GURs of Rs 72,300 crore. The government had borne Rs 27,300 crore while the upstream companies had to shell out Rs 42,800 crore of this subsidy. In the current fiscal, the government had initially budgeted for a petroleum subsidy of Rs 30,000 crore including Rs 22,000 crore for LPG and Rs 8,000 crore for Kerosene sales.

That estimate was recently revised to Rs 40,000 crore along with a decision to exempt upstream firms from burden sharing, indicating the government expects full year Under-recoveries to land at Rs 40,000 crore. The latest hike in crude rates will jack up petrol prices which have already risen by an average 12% since January to Rs 63.16 per liter. Diesel prices have gone up by 8% to Rs 49.57 per liter during the period.

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