Diesel price hike only way to cut FY14 subsidy burden: ONGC

Lamenting the high fuel subsidy burden, Sudhir Vasudeva, chairman, ONGC, says hiking diesel price is the only option to combat rising fuel prices globally.

Also read: ONGC's Q1 subsidy burden around Rs 12300cr

Speaking to CNBC-TV18, Vasudeva says the company will be facing a far larger subsidy burden this year (FY14) than it did in FY13. The company paid Rs 49421 crore in FY13 as subsidy burden.
“In Q1 we have got USD 40.17 per barrel after the discounts. Now cost of production for the year 2012-13 is USD 40.08. That means I am getting only 13-14 cents for every barrel of oil production. In that case, how do I survive? Not only do we have to generate funds for sustaining our today’s operation but we also have to generate funds for propelling our growth for future. So, now, it is a matter of our survival," says Vasudeva.
Additionally, Vasudeva says the upstream company needs a net realisation of atleast USD 65 per barrel and a one-time diesel price hike to be able to combat the rising fuel prices. Below is the edited transcript of Vasudeva’s interview to CNBC-TV18. Q: When the year started the hope was that from Rs 1.6 lakh crore, the under-recoveries would come down to Rs 1 lakh crore and upstream will benefit. But as we have seen with passage of time that is going up and in fact now we believe that it could actually end up at Rs 1.8 lakh crore. What is the risk that Oil and Natural Gas Corporation (ONGC) will end up paying more in absolute terms?
A: It is a risk in the sense that last year we ended up paying Rs 49421 crore, which is Rs 5000 crore more than what we paid in the previous year and that too despite additional burden of about Rs 5000 crore of cess.
That was too high and when calculation was done, it was indicated that next year, that is in fiscal 2013-14, the under recoveries would be of the order of Rs 80,000 crore, and the government will pay Rs 20,000 crore and the E&P companies will still pay Rs 60,000 crore. So, this was a matter of concern.
With today’s projection of under-recoveries going to Rs 180,000 crore and if the government is not in a position to give because of fiscal deficit, oil marketing companies (OMCs) certainly are not in a position to give because of their large borrowings. However, if this is passed on to companies like ONGC and Oil India then our back is also going to break.
Just to substantiate my point, in Q1 we have got USD 40.17 after the discounts. Now cost of production for the year 2012-13 is USD 40.08. That means I am getting only 13-14 cents for every barrel of oil production. In that case, how do I survive? Not only do we have to generate funds for sustaining our today’s operation but we also have to generate funds for propelling our growth for future. So, this is the matter of our survival.

Q: Infact USD 40.1-40.2 is where it was capped at in Q1 and looks like could be the case again in Q2. What is your call looking at your capex what is the bear minimum net realisation that you think should be allowed?
A: We are asking that we should be given about USD 65 per barrel. Infact, in the presentation which we have made to Kirit Parekh committee, we have indicated that we should be given USD 65 and in case the oil prices are USD 65, then we should be given 100 percent. In case oil prices increase then we are willing to share this with the government.

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We had even indicated that between USD 65 and up to USD 100, we can share about 85 percent with the government and 15 percent only to us and beyond 100, 90 percent to be given to government and 10 percent with us. The rationale for that was that when oil prices increase, the services cost increase immediately. So we have to pay for those services cost as well.
In case of ONGC, it is all the more pertinent because we are producing from old fields where the cost of operation is increasing every year. Our capex is required for even modernisation of facilities, but the OPEC is increasing at a rate of 7-8 percent. This is only ironical that with rupee depreciation we get benefited but at the same time we are worried that if the subsidy burden goes up, the gold post can change and then we can be asked to pay more, the formula of subsidy calculation itself can change. Q: What do you think needs to be done, do you think a one-time diesel price hike will change sentiment?
A: I hope because that is the only rationale way of doing it. If OMCs are not in a position to bear this burden and if the government also cannot share more subsidy because of fiscal deficit, then any more subsidy burden will break our back. It has to be passed on to the consumers. Only thing is we have to educate the consumers and they have to take part of this burden.

Q: Just shifting focus to production then under the current scenario that you are working with do you think that you will be able to deliver a guidance of increasing production to 1.5 MMT this year?
A: Whatever capex has been already committed, we will atleast see to it that the production increases. Last year we produced about 26.12 million tonnes and we are already indicating that we will produce in excess of one million tonnes this year. Our MOU target for very good category itself is 27.24 which is 1.12 million tonnes more than what we produced last year.
Similarly, in gas it is more but we will certainly exceed this 27.24 because this is a very good target but MOU excellent target is 28.6 MMT. So, we should be somewhere between 27.24 and 28.6. I have no reason not to believe that we should be closer to 28.6 than 27.24. Q: Let me come to the Anadarko deal then because that deal was closed last week, the stock reacted negatively to that. A lot of analysts believe that there was no reason to pay 10 percent premium to the Videocon deal, what is your comment on that?
A: We have done our due diligence very methodically, very closely. So, we don't think we have paid anything more than what was really called for. Q: Is there a risk that you will actually end up with degrowth in FY profit because even in Q1 you actually reported degrowth even taking into account the pension provision. So is there a risk that for FY14 also you will actually end up reporting degrowth?
A: If one sees Q1, but for the money which was paid towards employee welfare, we had earlier only made provision. So, with that we have met the expectations of the market. Profit after taking consideration of that is about Rs 5000 crore and I only hope that good sense will prevail and government will continue with the reforms whether it is one-time increase of diesel or gradual increase of 50 paisa etc. We also hope that the oil prices do not go beyond what they are today and rupee also stays stable. We should be able to maintain our profitability.

Q: Any impact from Syria?
A: As far as ONGC Videsh Ltd (OVL) is concerned, in the last one year we have not been able to do anything. We have invoked that forced measure and then we are out of field there. If Syria’s surrounding areas get affected, if oil supplies get affected then this will have repercussions either on oil prices or physical disruption of supplies etc.