Oil Tanker_ONGC_ProjectsMonitorONGC has requested the petroleum ministry that existing under-recoveries sharing mechanism may be replaced with a mechanism to ensure a minimum net realization of USD 65/bbl of crude price to ONGC.

In a communication to the ministry, ONGC stated that owing to the prevalent under-recovery sharing mechanism, ONGC’s endeavours to grow domestic hydrocarbon production and enhance India’s energy security through international oil and gas equity are under serious threat. In case, existing mechanism is not immediately reviewed, it would not only hamper ONGC’s growth plans but would increase India’s dependence on imported crude.

Current under-recoveries sharing mechanism puts substantial burden on upstream companies. The mechanism for sharing under-recoveries by upstream oil companies was initially notified in the year 2003-04. The original intent was for upstream companies to share 33 percent of total under-recoveries in the ratio of their profit after tax. Over the years, the application of the mechanism has been ad-hoc and non-transparent, with upstream share varying between 30 per cent and 42 per cent during FY 2004 to FY 2013.

ONGC informed that in FY 2012, the government decided to mop up USD 56/bbl from ONGC and OIL, irrespective of international crude price and the total under-recoveries. During FY 2013, despite ONGC’s representation for reduction in its share of under-recoveries and significant increase in OID Cess, government continued mopping up USD 63/bbl for sold quantity of crude of ONGC which resulted in significant reduction in ONGC’s net realization and profitability.

During FY 2014, consequent upon adoption of certain fiscal measures like increase in price of Diesel by the Govt, to reduce the burden of under-recoveries of OMCs coupled with prevailing lower crude prices, total under-recoveries of OMCs have reduced significantly. Actual under-recoveries of OMCs during Q1 FY 2014 are Rs. 25,579 Crore as against Rs. 47,811 Crore during corresponding quarter of FY 2013. However, the government continued with the mechanism of mopping up USD 63/bbl from ONGC during Q1 FY 2014 resulting into increase in upstream share alarmingly to more than 60 per cent of total under-recoveries and ONGC’s net realization went down to all time low of the order of USD 40/bbl.

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