India squeezes its oil firms to meet fiscal deficit target

NEW DELHI Fri Nov 8, 2013 7:48pm IST

Employees manually fill containers with diesel during a power cut at a fuel station in New Delhi July 31, 2012. REUTERS/Adnan Abidi/Files

Employees manually fill containers with diesel during a power cut at a fuel station in New Delhi July 31, 2012.

Credit: Reuters/Adnan Abidi/Files

Related Topics

Stocks

   
Priyanka Gandhi Vadra, daughter of Congress party chief Sonia Gandhi, adjusts her flower garlands as she campaigns for her mother during an election meeting at Rae Bareli in Uttar Pradesh April 22, 2014. REUTERS/Pawan Kumar

Election 2014

More than 814 million people — a number larger than the population of Europe — are eligible to vote in the world’s biggest democratic exercise.  Full Coverage 

NEW DELHI (Reuters) - State-run oil companies are feeling the pain of the finance minister's determination to meet his fiscal deficit target, with officials warning that exploration is under threat and losses at oil firms could steepen.

Oil Minister M. Veerappa Moily warned the Finance Minister, P. Chidambaram, that the subsidy burden placed on upstream companies was making oil fields unviable.

His ministry also forecast that revenue losses further downstream at fuel retailers Indian Oil Corp(IOC.NS), Bharat Petroleum(BPCL.NS) and Hindustan Petroleum(HPCL.NS) will rise to 803.16 billion rupees in October-March, from 623.32 billion rupees in April-September.

India budgeted fuel subsidies for the fiscal year to March 2014 at 650 billion rupees. The oil ministry said that is likely to be more like 1.4 trillion rupees.

The warning and figures were in oil ministry letters seen by Reuters. The oil and finance ministries declined to comment.

Chidambaram says the budget deficit target of 4.8 percent of GDP is a "red line" that will not be crossed as he tries to fend off a threatened downgrade of India's sovereign credit rating to "junk." The soaring fuel subsidy bill has put the target in jeopardy.

The finance and oil ministries want to raise the price of subsidised fuel, such as diesel, to reduce pressure on government spending.

But with state elections in coming weeks ahead of national elections that must be held by May, the chance of the coalition government agreeing to a significant price increase is slim.

Instead, the finance ministry is shifting much of the added cost of fuel subsidies onto the balance sheets of state oil exploration companies and oil retailers, such as Oil and Natural Gas Corporation (ONGC) (ONGC.NS) and IOC.

"In the given political scenario, the government is unlikely to bite the bullet by hiking the diesel prices by 3-5 rupees per litre. So there is no option except to bear the subsidy burden," a senior official at the oil ministry said.

Under the subsidy scheme, exploration companies sell crude and products to state refiners and retailers at a $56 per barrel discount to global prices.

It was "having a huge negative impact on the ability of ONGC and (Oil India Limited) to continue existing oil-and-gas discoveries," Moily wrote in a letter to his counterpart. "The burden on the upstream oil companies therefore needs to be reduced," he said.

ONGC, India's leading upstream oil company, has warned in two letters to the government in recent weeks that the company was only earning $40 a barrel for its oil, barely covering the cost of production and leaving nothing for sorely-need exploration and investment.

It said global prices have come down but the discount had not been adjusted.

Left unchanged, the current discount would "increase India's dependence on imported crude," ONGC said in one of the letters. Both were seen by Reuters.

ONGC Chairman Sudhir Vasudeva said his firm may have to start borrowing money if the subsidy burden is not lifted.

"Most of our projects are not viable at $55 a barrel and in the first half our realisation will definitely be less than $55 a barrel," Vasudeva told Reuters.

Asia's third-largest economy meets nearly 80 percent of its oil needs through imports - this year hit hard by a 22 percent depreciation of the rupee against dollar between May and August when the currency fell to a record low.

NOT ENOUGH

Preliminary calculations show that the finance ministry could defer subsidy payments to oil firms of 300-400 billion rupees until the next fiscal year, a senior finance ministry source with knowledge of the numbers said. There was a similar rollover into this year's budget from 2012/13.

In addition, the ministry may have to finance an extra 250-300 billion rupees of subsidy to fuel retailers in this fiscal year from spending cuts, the source said.

The subsidy pressure is unlikely to cheer investors contemplating the government's budget plan to sell a 10 percent stake in IOC.

On Friday, the IOC reported an 82.5 percent fall in net profit in the September quarter from a year ago. Shares in the company are down about 21 percent this year, underperforming a 4 percent rise in Nifty.

The government cancelled earlier overseas road shows for the IOC share sale, fearing a tepid response from investors, after the firm had posted a 30.93 billion rupee loss in the June quarter.

Under the budget plan, the government wanted to raise around $800 million from the IOC sale as part of a targeted $6.4 billion of stake sales in state-run companies.

The government might revive the road shows for overseas investors in New York, Boston and London starting next week. But officials are worried the government's reluctance to fully fund IOC's losses and its precarious finances will result in low interest.

"The rupee depreciation and delay in one time hike in diesel and LPG prices may continue to hurt the balance sheet of the oil companies, but we will surely meet the fiscal deficit target," said a second source at the finance ministry.

"Once elections are held, the next government can look at whole oil subsidy issue from a new perspective," he said.

(Editing by Frank Jack Daniel and Neil Fullick)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
sundaramvi wrote:
Both the Indian Govt and the oil companies are failing to take any action against ‘oil mafia’ which operates with political blessing. These are pilferages in the region of 5 to 8% of oil companies gross turnover. Stoppage of such theft would boost the profitability of oil companies. UPA Govt knows that finally all such losses are only to be borne by the public hence is not bothered about its misgovernance.

Nov 08, 2013 9:54pm IST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Market Eye

REUTERS SHOWCASE

Asian Markets

Asian Markets

Asian stocks flat after China PMI meets expectations  Full Article 

Chinese Economy

Chinese Economy

Factory activity shrinks for 4th month; pace of decline slows   Full Article 

International Gold

International Gold

Gold hovers near 2-1/2 month lows on firm equities, fund outflows  Full Article 

GM Lawsuit

GM Lawsuit

GM seeks U.S. court protection against ignition lawsuits  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage