Mumbai: Oil and Natural Gas Corp. (ONGC), India’s biggest state-owned oil and gas explorer, may see its net realizations fall to the lowest since the time it started bearing part of the subsidy burden to compensate the losses made by oil marketing companies (OMCs) in 2003-04.

Gross realisation for ONGC is the market price that it would earn if it sold crude oil in the open market, and net realisation is the price that it earns after the subsidy share is deducted from it.

In the first nine months of the current fiscal, ONGC’s net realization has fallen to $41.36 per barrel, according to a company note released on 14 February. This is close to the net realization of $41 per barrel earned during the last fiscal year— which was the lowest realization ever reported by ONGC.

Realizations fell sharply in the October-December quarter due to low crude prices and a bigger than expected share of the subsidy burden that ONGC had to bear.

As a result, realizations fell to $35.57 per barrel. Global crude oil prices averaged $76 per barrel during the quarter.

ONGC paid 9,458 crore (or $40.43 per barrel) to the government during the quarter as its share of subsidies.

Analysts do not want to hazard a guess on what the full year net realizations will settle at, and say that a lot will depend on how much subsidy ONGC has to pay in the final quarter.

“We believe it is high time clarity on the upstream subsidy mechanism is announced by the centre, as 4Q (fourth quarter) gross realisations average below $60/bbl (per barrel). The 3Q (third quarter) experience clouds both clarity and the government’s intention on subsidy reforms," said Antique Stock Broking Ltd in a report released on Monday.

According to the Antique report, contrary to expectations of a new formulae-based sharing (with zero subsidy till $60 per barrel crude oil price and a subsidy burden of 85-90% from $61-100 per barrel under implementation from third quarter onwards) the government imposed a burden of 10,900 crore on upstream companies and kept its own share at 5,090 crore. The total subsidy for the quarter was at 15,980 crore.

As a result, net realizations fell to an “abysmal" level of $36-38 per barrel for ONGC and Oil India Ltd (OIL), said the report.

To be sure, the subsidy share demanded by the government has been varying from quarter to quarter and there has been no guidance on what the company would be asked to shell out in the final three months of the fiscal.

According to the company’s note, the subsidy burden borne by it in the third quarter shaved off revenues by 9,458 crore and its profit after tax by 5,386 crore. While this was lower than the impact witnessed by the company in the last fiscal, considering the crude price fell to an average of $76 per barrel, the impact of subsidy was more pronounced in the current quarter.

“Upstream contributed nearly 70% (and ONGC: 60%) of Q3FY15 under recoveries, which was a major disappointment given that realisations were strained due to lower oil prices," said Jal Irani and Yusufi Kapadia from Edelweiss Securities Ltd in a note released on 13 February.

A 16 February note by Nomura Securities International, Inc. on ONGC pointed out the brokerage’s ‘Buy’ rating on the company is primarily based on the government deciding on a remunerative subsidy-sharing formula.

“Although the decision is further delayed, we continue to believe that the government will have to decide soon. Early subsidy-sharing clarity remains the key trigger, apart from further strength in oil prices," the note said.

The highest realizations reported by ONGC was in the second quarter of fiscal 2012, when it earned $83.71 per barrel. At the time, crude prices averaged $116.94 per barrel and subsidy share per barrel was at $33.24.

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