New Delhi: The much talked about Rs11,500 crore share sale of state-run Oil and Natural Gas Corp (ONGC) has been deferred again and is unlikely to hit the market before mid-August.
The public offer in which government plans to sell 5% (427.77 million shares) was originally planned for 2010-11 fiscal but was deferred to 5 April as the company did not have adequate number of independent directors on its board to meet the market regulator Sebi’s listing norm.
It was then scheduled for July but it has again been deferred, a senior government official said here.
“This not the right time for the follow-on public offer (FPO). It is now being planned to happen after ONGC reports its first quarter earnings,” he said adding the Q1 numbers will give out the government mood on fuel subsidy sharing.
Oil and gas producers like ONGC have to make good a part of the revenues that fuel retailers lose on selling diesel, domestic LPG and kerosene at government-controlled rates. The discount that ONGC gives to IOC, BPCL and HPCL on crude oil it sells to them, is decided on a quarter-to-quarter basis.
“The entire system is ad-hoc and lacks transparency. For investors, this is a matter of concern. And without clarity on subsidy sharing mechanism, it would have been futile to go to market,” the official said.
Post-FPO, the government’s stake in ONGC would come down to 69.14% from the current 74.14%.
Even ONGC has opposed the ad-hoc fuel subsidy sharing mechanism.
“The upstream companies’ share of under-recoveries (revenue loss) has been increased from one-third (33.33%) to 38.75% for the year 2010-11 and 46.89% for Q4 of FY11,” ONGC chairman and managing director A. K. Hazarika recently said in his letter to Oil secretary G. C. Chaturvedi.
As a result, ONGC’s net realization on crude oil sales translated into just $38.75 per barrel, the lowest in the last eight quarters, he said. “It has not only adversely affected our profits and cash flows, but also investor sentiment, reflected in fall in market capitalization from Rs265,520 crore to Rs228,860 crore, i.e. by 14%.”
Hazarika stated that ONGC should get a net crude price of $58-60 per barrel to meet its planned capital investments of Rs30,000 crore.
He said upstream firms ONGC, Oil India and GAIL India should be asked to bear one-third of under-recoveries if crude oil stays under $70 per barrel.
But if it touches $75 a barrel, their share should come down to 30%. This share should progressively fall to 25% if crude touches $100, he added.
“If the formula of one-third under-recovery being passed on to upstream companies during the year 2011-12 when the crude prices are likely to remain over $100 per barrel is continued, this would have serious impact on the profitability and cash flows of upstream companies,“ Hazarika had written.
Upstream firms contributed Rs30,297 crore out of the total revenue loss of Rs78,189 crore in the 2010-11 fiscal. Of this, ONGC’s share was Rs24,892 crore.
Alternatively, he suggested that the government impose a special oil tax or windfall tax to take 20-80% of incremental revenues accruing over and above the crude oil price of $60 per barrel.
Hazarika said for every dollar hike in crude oil prices, the increase in under-recovery or revenue loss is Rs3,440 crore. Of this, the upstream share is Rs1,146.67 crore according to the one-third subsidy sharing formula.
ONGC contributes 82.16% of the upstream share. Hazarika said the levy of a special oil tax has been recommended by expert committees headed by B. K. Chaturvedi in June, 2008, and by Kirit S. Parikh in August 2009.
“Ministry of petroleum and natural gas is requested to notify a fair and transparent mechanism for sharing of under- recoveries”, he wrote.
He said a part of increase in crude price should be retained by upstream oil companies to meet increased cost of production besides existing and future plans and obligations.