ONGC profit falls as subsidy costs weigh

A technician works inside the Oil and Natural Gas Corp (ONGC) group gathering station on the outskirts of Ahmedabad March 2, 2012.

NEW DELHI (Reuters) - State-run producer Oil & Natural Gas Corp.'s (ONGC.NS) quarterly profit dropped more than 30 percent because of a sharp rise in the discount it has to give state refiners even as crude prices fell.

ONGC, India's third-biggest company by market value, is forced to subsidise state refineries by selling them crude cheaply so they can supply retail markets at capped prices. The government increased the discount that crude oil suppliers have to give refiners earlier this year.

ONGC's cash could be depleted rapidly if the subsidy stayed at the same level, top officials warned.

"We are only meeting our day-to-day operations," Chairman Sudhir Vasudeva told reporters on Thursday. "This is a matter of concern because our cost of production is increasing."

Net profit fell to 58.97 billion rupees for the second quarter ended September from 86.42 billion rupees in 2011. Analysts had expected net profit of nearly 61 billion rupees, according to a Reuters poll of brokerages.

The cost of the subsidy more than doubled to 123.30 billion rupees while the amount ONGC gets paid per barrel of crude fell to $46.8 per barrel from $82.6 a barrel a year ago.

ONGC needs more than $60 per barrel to fund planned expenditure, Vasudeva said.

ONGC has been investing to maintain output from its old fields and has capital spending plans of around 340 billion rupees both this year and next. It has also been scouting for assets abroad, under pressure from the government to meet rising demand from an economy expected to grow 6.5 percent in 2012.

Shares in ONGC, valued at nearly $42 billion, closed 0.6 percent lower on Thursday, ahead of the results. The stock has risen about 3.5 percent so far in 2012, underperforming a 10.2 percent rise in the sectoral index.

(Reporting by Nidhi Verma and Prashant Mehra; Editing by Matthew Tostevin)