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Finance Ministry Wants $56/Bbl Upstream Subsidy: Sources

  • India's finance ministry has suggested upstream companies should give a discount of $56 per barrel to state fuel retailers this fiscal year, government sources said, a move that could raise their subsidy payout by over 60 percent from a year ago.The finance minister has assumed an average global price of $110 a barrel for the fiscal year to March 2012 and suggested that state oil marketing companies should absorb 5 percent of revenuelosses on the sale of fuels, two officials with knowledge of the matter said on Wednesday.The federal government fixes the retail prices of liquefied petroleum gas, kerosene and diesel to protect the poor, leading to revenue losses to Indian Oil Corp , Bharat Petroleum Corp and Hindustan Petroleum Corp .

  • Fuel retailers are against absorbing 5 percent of revenue losses as a delay in releasing cash subsidy has increased their borrowings and interest burden, said the sources."Assuming an average rupee rate of 50 to a dollar, upstream firms' subsidy share will go up to about 490 billion rupees in the current year," said one of the sources.Due to high oil prices and a depreciating rupee, oil marketing firms' revenue losses on subsidised sale of fuels are likely to rise to 1.4 trillion rupees in 2011-12 versus 782 billion rupees last year, said an oil ministry source.The government compensates for some of these losses through a cash subsidy, while part is borne by the state-owned Oil and Natural Gas Corp , Oil India and GAIL through a discount on sale of crude oil and products.There is no fixed formula on subsidy sharing, leading to uncertainities for investors in the stocks of oil companies.
  • "This would give more clarity to the boards while approving capital expenditure plans... upstream companies feel comfortable if this is decided in the begining of the year," said a separate official.
  • This official also said the finance ministry should pay a cash subsidy of about 220 billion rupees to oil marketing firms to partly compensate them for revenue loss of about 320 billion rupees in the October-December quarter.
  • The revenue losses should be equally divided among government, upstream companies and consumers, he suggested.

  • Since a fuel price hike, including that of gasoline, is unlikely before elections in sveral states scheduled in March, and in the absence of any subsidy-sharing formula, the finance ministry should bear two-third of revenue losses, he said.In 2010/11, cash compensation from finance ministry covered 52.43 percent of the revenue losses, discounts from upstream companies was about 38.74 percent, while the rest was absorbed by marketing firms and consumers.In April-September 2011, oil marketing companies suffered a revenue loss of 649 billion rupees. Of this, finance ministry agreed to compensate for 46 percent, while a third was covered by upstream companies.

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