New subsidy formula: Pre-curser to ONGC divestment

ONGC share is ruling mildly in the positive at 352 (up 0.21%) when BSE Sensex is down 1.2%. Petroleum ministry has finalised a new oil subsidy-sharing formula, under which ONGC will have to pay only Rs 3,252 crore to the three state-owned fuel marketing companies (IOC, BPCL and HPCL) for Q3FY15 (Oct-Dec 2014) and virtually nothing for Q4FY15 (Jan-Mar 2015).

The newly approved slab-based subsidy sharing formula calls for:

• Zero contribution towards subsidy by ONGC and Oil India, when crude oil price is less than and equal to $60 a barrel
• 85% contribution for crude oil prices between $60 to $100 a barrel
• 90% contribution for crude oil price exceeding $100 per barrel.

Since average price of Indian crude basket during Oct-Dec 2014 stood at $75.17 per barrel and considering average rupee-dollar exchange rate at Rs 62 per dollar, total contribution of ONGC and OIL for Q3FY15 is Rs 3,746 crore (Rs 3,252 crore for ONGC and Rs 494 crore for OIL). Average price of Indian crude basket for January 2015 stood at $46. Hence, even considering an uptick for the balance 2 months, average Q4FY15 crude basket is unlikely to exceed $60 a barrel.

Such a favourable subsidy sharing burden will have the 5% divestment in ONGC to sail through very easily. This will be take the Government Rs. 15,000 crore closer to its Rs. 43,425 crore target for FY15, with barely 1.5 months to spare. Thus, the new subsidy sharing formula is a pre-curser to closing FY15 on a target.