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State-run energy explorer ONGC can ill afford to buy 5 Percent stake in fuel retailer IndianOil Corp, according to senior company executives, as the about INR 2,500-crore purchase will strain the company's already stretched finances due to the subsidy burden.

There is also fear that Oil and Natural Gas Company (ONGC) might have to foot a part of the fertilizer and the power subsidy bill, which the government will incur when natural gas prices increase from April 1, the executives added. The government on Friday cleared 10 Percent stake sale in IOL to upstream oil companies Oil and Natural Gas Company and OIL.ONGC and OIL are expected to pick 5 Percent each over the next few days.

"The timing of this deal is very unfortunate, but we hardly have a choice, the government is the majority owner of ONGC, so its decisions are final. It's not that IOC is a bad investment per se, but it's the timing," a senior ONGC executive on condition of anonymity. "The ad-hoc subsidy burden that we have to bear is on a record rise, especially now that the government has increased the cap on subsidised LPG cylinders to 12, from the previous nine." ONGC bears a portion of the losses that staterun fuel retailers incur on selling diesel, LPG and kerosene at subsidised rates. The remaining gap is covered through cash subsidies from the government. While diesel has the highest contribution to aggregate gross under-recoveries (GUR), according to industry estimates, LPG had, on an average, contributed about 25 Percent to the total GUR over the three fiscal years to end-2012-13 and increased to just above 30 Percent for the first half of 2013-14.

For the quarter to end-December, ONGC will have to pay a record Rs13,764 crore as fuel subsidy. The company has said that its subsidy outgo of about INR 26,418 crore in the April-September period has already hit it's net profit by INR 14,752 crore, and that higher subsidy in the December quarter will put a question mark on future profitability.

"Even after repeatedly telling the government that we will have to either dip into our cash reserves or take working capital loans for the first time in our history in case it does not approve a net realisation of $65 per barrel, as opposed to the $40-$45 that we get right now, we have still got no response. We also have to factor in the fact that ONGC might have to foot a part of the fertilizer and power subsidy bills, which the government will have to incur when natural gas prices go up from April," another senior ONGC executive, who did not wish to be named, said.
The executive was alluding to the growing fear that, as a consequence of natural gas prices doubling next month, ONGC might have to foot a part of the additional fertiliser and power subsidies of close to INR 11,000 crore and INR 30,000 crore, respectively.

"Both ONGC and Oil India are currently selling close to half their entire gas output of around 30 mmscmd to fertilizer companies at a price fixed by the government, but all the positives of the new gas price will be wiped away if the companies are made to foot the additional subsidy payments," the same executive said. The fertiliser ministry has said that the new price for gas will increase the cost of fertilisers by INR 6,000 per tonne. Electricity, on the other hand, will be dearer by INR 2 per unit, according to the power ministry.

Source-On Request