ONGC pays $ 941 mm subsidy to help keep retail fuel prices low

Jun 20, 2005 02:00 AM

Oil & Natural Gas Corp., or ONGC, India's largest explorer, paid 52 % more in subsidies last year to help the government keep retail fuel prices low as the cost of crude oil surged to a record, a company official said.
The company, scheduled to announce its audited earnings for the quarter ended March 31, paid 41 bn rupees ($ 941 mm) in subsidies, R.S. Sharma, the company's director of finance said on June 17.

Subsidy payments are paring profits at Oil & Natural Gas, jeopardizing investment in future production projects needed to secure fuel supply to Asia's fourth largest economy. India imports 70 % of its oil to meet growing demand as domestic output stagnates. Oil & Natural Gas may borrow as much as $ 3 bn to buy overseas assets enabling it to pump more oil.
“Subsidizing fuel prices affects the company's cash flow and restricts their bidding potential for overseas projects,“ said Dhimant Shah, fund manager at ASK Raymond James in Mumbai that manages $ 200 mm in Indian stocks. „With oil prices rising to a new high, there will be a greater pressure on the company to pay more subsidies.“

Oil & Natural Gas and GAIL (India), a natural gas distributor, will have to continue to share the burden of subsidies with state-run refiners, India's Trade Minister Kamal Nath said in New Delhi after a cabinet meeting at which the government decided to allow refiners to narrow their revenue losses by raising auto fuel prices.
Gasoline prices will be raised by 2.5 rupees a litre and diesel prices by 2 rupees a litre, Nath said. Oil prices rose to a record in New York and are 55 % higher than a year ago.

The two companies have shared subsidy payments on cooking fuels with Indian Oil Corp. and other state-run refiners. The government wants companies to help subsidize auto fuels too, Aiyar said. Last year Oil & Natural Gas and GAIL shared one-third of the country's $ 1.8 bn subsidy bill.
Prime Minister Manmohan Singh hasn't raised fuel prices as oil costs increased because of opposition from allies whose support is essential to the survival of the year-old coalition government.

Opponents say more expensive cooking and transport fuel will spur inflation and hurt the poor. In India, the world's second most populous nation, 350 mm people live on less than $ 1 a day, according to the World Bank.
„The government should come with a clear cut policy on how it wants to deal with high oil prices instead of asking companies to subsidize fuel prices in a stop-gap manner,“ Shah said.

Refiners lost as much as 203 bn rupees in revenue in the year ended March 31 because they weren't allowed to raise retail fuel prices to offset the higher costs of buying crude oil, Indian Oil's chairman, S. Behuria, said on May 10. Auto fuel prices were last increased in November. Prices of liquefied petroleum gas, a cooking fuel, were raised on June 15, 2004, while kerosene prices haven't changed since April 2002.
Oil & Natural Gas, India's most profitable company, reported on April 25 net income of 121.75 bn rupees for the year ended March 31 from 86.64 bn rupees a year earlier. The New-Delhi based oil explorer, which is 74 % state-owned, didn't give the size of its subsidy payment, saying only that it reduced profit by 5.5 bn rupees.

In the three quarters ended December, the company earned a profit of 91.85 bn rupees. Profit for the fourth quarter ended March, calculated by deducting the earlier three quarters' income from the full year, comes to 29.9 bn rupees. The company earned 19.9 bn rupees profit in the fourth quarter of the previous year.
„The earnings that they will state will not be very different from what they gave out in April,“ said Karthik Ramakrishnan, analyst at Sunidhi Consultancy Services.

Oil & Natural Gas has invited lenders including Citigroup and Deutsche Bank to advise it on raising as much as $ 3 bn in loans to acquire assets as the company's domestic fields age. Oil & Natural Gas may spend as much as $ 25 bn on buying stakes in oil and gas fields abroad, Chairman Subir Raha said on March 24. The company has plans to acquire assets in Iran, Venezuela, Canada and Russia. It has investments of at least $ 3 bn committed to operations in Russia and Sudan.
„The biggest concern about the company is the subsidy payment it is being asked to make,“ said Jaspreet Singh, senior analyst at Prabhudas Lilladher Securities. „With crude prices rising, it may be asked to pay higher subsidies this year.“

Source: Indian Express Newspapers
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