ONGC, OIL india face $54/b cap on sales of Oil

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The government plans to cap the price of crude oil sold by ONGC and Oil India to state refiners at $54/barrel this financial year despite an average market price of $110/barrel to help them sell diesel, kerosene and cooking gas below market rates.

The move, which is under inter-ministerial consultation, will severely hurt finances of ONGC but ease government's subsidy burden and help it in containing fiscal deficit, government officials said requesting anonymity.

The finance ministry has expressed deep concern over widening fiscal deficit and has proposed a new subsidy-sharing formula where larger contributions are sought from upstream firms such as ONGC, government officials said.

"The proposal is part of the finance ministry's fiscal management plan," one official said. Finance minister Pranab Mukherjee raised concerns about the fiscal situation on Saturday and said India should learn lessons from the Euro-zone crisis and it should not allow fiscal deficit to go beyond a certain limit.

It is estimated that state oil firms Indian oil Corp, Hindustan Petroleum and Bharat Petroleum would incur about Rs 140,000 crore revenue loss in 2011-12 for selling fuel at controlled rates, officials said. So far, the finance ministry has agreed to provide Rs 30,000 crore to oil companies, which have suffered a revenue loss of Rs 64,900 crore and a net loss of Rs 23,440 crore in the first half of 2011-12.

Officials said state fuel retailers were already in red and they could not absorb any losses. "As the government has limited resources, upstream firms have to bear a larger burden. After all the government has given them oil blocks on nomination basis (without global biddings)," one official said requesting anonymity. Officials said that the government would not hesitate to impose a heavier burden on upstream firms if international crude oil prices surge further.

A senior ONGC official said that the proposed could derail ONGC's investment plans. The company plans to invest about Rs 56,000 crore in the next financial year. ONGC's net realization on crude oil sale was $66.52/barrel in the first half of 2011-12 after shouldering one-third subsidy burden. The company is expected to announce its third quarter results on February 2.