In an interview to CNBC-TV18, RS Sharma, Former Chairman of ONGC spoke about the current environment in the oil and gas space
There is no case for the government continuing with the diesel subsidy anymore beleives RS Sharma, former chairman, ONGC .
Speaking to CNBC-TV18, Sharma says that there should be some mechanism by which automatic adjustment of fuel prices takes place. Sharma suggests that diesel prices should be corrected according to market situations fortnightly.
“Under recoveries having gone up to very steep levels. Hence, the government should give one lump sum increase and then continue with a monthly increase of Re 1/litre until these under recoveries are done away with. Until and unless that happens, the oil sector is going to go into much deeper problems,” adds Sharma.
Below is the edited transcript of Sharma’s interview to CNBC-TV18.
Q: The first question on everyone’s mind is this whole delay in moving on diesel prices in one go which has led to quite a bit of derating of the entire sector. What do you think is the need of the hour and how do you think the government should go about it?
A: The whole process of decision making is happening in an ad hoc manner. This has been causing all the uncertainties and disturbance in the whole system. If one can put in a mechanism then there is automatic adjustment in the pricing levels; all the stake holders know that with any kind of development what the consequences are going to be how the product prices will move; the investor will know how the company’s bottom-line will behave. Hence, this ad-hocism creates so much uncertainties that the entire decision making process becomes difficult and right now, we find ourselves in a situation that it is almost a chaotic situation for the sector.
Q: When the year started the hope was that the overall subsidy burden will come down and hence the upstream burden will also come down. Then of course the market started factoring in the same absolute burden even though proportionate burden would come down. But now the risk is that the upstream companies may actually end up paying more in absolute terms as well and this is a fear that ONGC management also confirmed. How genuine would that fear be and what would that mean for ONGC?
A: I am seriously apprehensive of the scenario of ONGC’s subsidy burden going up in absolute terms as well as in percentage terms. We have seen this story in the last two quarters itself.
In the last quarter, ONGC’s retention price for crude oil was just about USD 40/barrel. It is not a sustainable level and what I seriously get worried about is the way the downstream companies’ stocks have gone down. The market value of those companies is much below than the value of the physical value of the assets those companies own.
I am afraid ONGC and Oil India they may also be going in the same direction if there is no assurance, there is no commitment coming at the top. The one person amongst all these negativity who has been talking very strongly positive and who has been talking with lot of common sense, lot of understanding and lot of assurance has been the petroleum minister Veerappa Moily. I do wish that whatever his intentions are, he is able to get them implemented but it doesn’t seem to be happening so, so let us see where things move.
Q: Veerappa Moily’s intention is that there should be a one time diesel price hike and going forward the possibility of that Rs 0.50 should then become a Re 1 hike for diesel and then eventually try to move out of the diesel subsidy entirely and may be even move on LPG. Do you think it is feasible?
A: Yes absolutely. Those kind of words have come right up to the Prime Minister’s level that there is no case of subsidising diesel, the subsidy from diesel has to go. I have personally interacted with Veerappa Moily and I also suggested him that it would be difficult in a country like India, in a political situation like ours to do an ad hoc increase of Rs 3-5 per litre.
My suggestion was that on fortnightly basis, some correction in the diesel prices should take place, adjustments should take place and right now the under recoveries on diesel have gone to almost Rs 15/litre. So, doing Rs 0.45-0.40/litre every month is not going to address the situation. Since last month that adjustment has not been done. So there is a case that because of the unprecedented situation of this under recoveries having gone up to very steep level. Give one lump sum increase but then monthly increase of Re 1/litre has to be continued until these under recoveries are done away with. Until and unless that happens, the oil sector is going to go into much deeper problems.
The other problem I am worried about is these oil marketing companies (OMCs) like Indian Oil Corporation ( IOC ), Hindustan Petroleum Corporation ( HPCL ), Bharat Petroleum Corporation ( BPCL ), they have been able to sustain the distribution network without any disturbance and without any dislocation. So, a huge credit goes to these companies. But if they do not get comfort and if the current system of the marketing, distribution gets dislocated, I am afraid it is going to be absolute chaos in the economy.
Q: Do you also think that we need to relook at the taxing structure of some of these products for example on petrol we are paying amongst the highest prices in the world due to the nature of the tax structure that we work with?
A: I do not know how that will happen because this is the largest revenue earner for the central and the state governments. How will they be able to compromise on reducing these taxes, I am not sure, but at the same time this policy of imposing higher taxes and then under recoveries then giving subsidy support, that kind of mechanism does not justify through any rationale. So, there has to be more clear thinking rather than the government at the year-end giving sustenance support to these OMCs so they do not go into losses. It is better not to collect that much taxes so that under recoveries reduce in terms of the reduced taxation itself rather than get higher amount of taxes and then coming up from the central exchequer at the end of the year giving them the subsidy support. So, a more balanced view needs to be taken.
A: From whatever I hear from the government statements, they are desperate to go through this divestment. But personally, I hold the view that the current share price of the company is highly depressed, the government is not going to get a true representative value of the stock that this company is holding. So, since they are desperate they will go through, they will get whatever they will be able to get but that will not be the true worth of the share price which they sell as of now.
ONGC stock price
On July 31, 2014, Oil and Natural Gas Corporation closed at Rs 395.35, down Rs 3.4, or 0.85 percent. The 52-week high of the share was Rs 472.00 and the 52-week low was Rs 234.40.
The company's trailing 12-month (TTM) EPS was at Rs 25.83 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 15.31. The latest book value of the company is Rs 171.29 per share. At current value, the price-to-book value of the company is 2.31.
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