OREANDA-NEWS. April 16, 2012. Produce more is what ONGC is often told. But, how does the public sector giant increase its output when its finances are being squeezed because of Government policies, subsidies and now increased cess.

The public sector oil major is seeking a remunerative crude oil price that will help sustain its operations. For, if the present mechanism continues, ONGC's internal resources will not be able to sustain it beyond two years.

Also, meeting its planned outlay for 2012-13 of over Rs 33,000 crore will be tough, if the present situation continues. It will either have to dip into its cash reserves or borrow.

So far (the first nine months of the current fiscal) ONGC has already given Rs 30,000 crore towards subsidy.

In the past eight years (till the nine months of last fiscal) ONGC has forked out about Rs 1,52,000 crore as subsidy to partially compensate the public sector oil marketing companies (OMCs) for selling petroleum products below cost. The net impact of this on ONGC's profit has been about Rs 88,900 crore.

“Had the same amount remained with the company, it would have got re-invested in development,” said, Mr Sudhir Vasudeva, Chairman and Managing Director, ONGC.

In fact, the money could have been used to buy equity abroad, he said. Industry trackers say, the amount on subsidy could have easily got 9 to 10 million tonne of oil for the country from equity abroad.

At the beginning of 2011-12, ONGC had a cash reserve of about Rs 22,000 crore. Out of this, over Rs 8,000 crore is in the Site Restoration Fund – which is used exclusively for restoration of sites that have been abandoned.

Besides the subsidy outgo, the increase in cess by 2,000 a tonne on domestically produced crude oil is adding to ONGC's woes. For most of the blocks awarded before the auction regime (NELP) – Ravva and Panna-Mukta-Tapti joint venture fields – cess is fixed at Rs 900 a tonne. The NELP blocks are exempted from cess. ONGC's cess outgo will increase by Rs 4,700 crore per annum from 2012-13.

For 2010-11, ONGC has paid cess of Rs 5,696 crore and for the nine months of last fiscal (2011-12), it has paid Rs 4,213 crore as cess. For the full year, it is projected to pay Rs 5,838 crore.

Increased cess would mean cost of production also going up, Mr Vasudeva said. ONGC's main production is from the existing ageing fields. Though the company would benefit from high crude oil prices, this would also mean cost of services going up. Suppose the cost of production is USD 38 a barrel, and to this a cess of USD 5.7 barrel is added, it will add up to USD 43 a barrel.

Even if ONGC sells crude oil at USD 120 a barrel, it has to offer a discount to OMCs on this. In 2010-11 when international crude oil prices were averaging USD 89 a barrel, ONGC's retention price was USD 53 a barrel. For the first nine months of the last fiscal (2011-12) when the global price averaged USD 116 a barrel, ONGC got USD 58 a barrel.

ONGC has written to the nodal ministry, Ministry for Petroleum and Natural Gas, to lower the subsidy burden on them so that additional cess outgo is offset. It is yet to be told what its subsidy outgo for the fourth quarter of the last fiscal will be.

This is leading to uncertainty on how much the company can gain from high crude prices, as if the subsidy increases their retention price will further squeeze.