The much-anticipated fuel subsidy sharing mechanism, spelt out by the Oil Secretary on Thursday, may end up leaving a bitter taste in the mouth for the public sector oil and gas majors. Going by the broad contours of the announcement and the projected under-recoveries for FY 11 (Rs 52,000 crore), both upstream and downstream companies may end up bearing a higher burden of under-recoveries this fiscal than in FY 10. This despite significant reduction of close to Rs 20,000 crore in total projected under-recoveries for FY 11, after the petrol price deregulation and price hikes in diesel, PDS kerosene and domestic LPG last month.
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According to the Oil Secretary's statement, the Government will bear at least 50 per cent of the total under-recoveries, 1/3 {+r} {+d} (around 33 per cent) of under-recoveries will be borne by the upstream companies, and devolution of the balance 17 per cent, will be decided later, based on the performance of the downstream oil marketing companies. Reading between the lines, this likely means that downstream companies may bear the remaining 17 per cent, unless exceptional circumstances warrant otherwise.
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Also, expectations that GAIL would be exempted from the subsidy sharing mechanism (as recommended by the Kirit Parikh Committee) were belied, with the Oil Secretary categorically stating otherwise. The proposals may result in an increase in burden on the upstream companies (ONGC and Oil India) and GAIL in FY 11, due to their having to bear 1/3 {+r} {+d} share of under-recoveries on both transport fuels (petrol and diesel) and cooking fuels (PDS kerosene and domestic LPG). In FY 10, these companies had to compensate only for under-recoveries on transport fuels. This sting in the tail is expected to see these companies bear in excess of Rs 17,300 crore in FY 11 compared with Rs 14,430 crore in FY 10. If the 17 per cent balance under-recoveries finally devolves on the downstream companies (Indian Oil, BPCL and HPCL), they would have to bear in excess of Rs 8,600 crore in FY 11 compared with Rs 5,621 crore in FY 10. The government's share of the under-recoveries at the minimum 50 per cent would come to around Rs 26,000 crore in FY 11, the same as last year.
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