Oil India currently figures out amongst the top losers on the BSE, going down over 3.5% to Rs.360. ONGC is also down in the red but not as much as Oil India – it went down over 1.5% to Rs.226.70.

The reason for both these upstream oil companies going down into the red today is a new order from the Petroleum Ministry. The Govt has decided that ONGC and Oil India will now pay royalty to all similarly placed crude oil-producing states at pre-discount prices effective February 1, 2014, pending the outcome of the special leave appeal filed by ONGC before the Supreme Court.

What this means is that both the companies will have to pay royalty at pre-discount prices – prices on gross realisation on sale of crude oil and not on the net price. And this will be paid to oil producing states like Assam, Gujarat, AP, Rajasthan and Tamil Nadu. This is going to put an additional burden of over $1 billion on these companies.

The upstream companies will need to bear this burden in order to compensate downstream companies like IOC, HPCL and BPCL as they sell products as such below market cost.

In FY16, ONGC reported gross realisation of $48.26/barrel and net realisation of $47.14/barrel, which s after paying subsidy of $1.12/barrel.