Oil Ministry to seek Cabinet nod on diesel deregulation

Oil Ministry will seek Cabinet nod for freeing diesel prices after retail rates achieve parity with global levels, and has proposed to cut subsidy payout by upstream firm like ONGC by half.

PTI| Updated: Aug 26, 2014, 18:01 PM IST

New Delhi: Oil Ministry will seek Cabinet nod for freeing diesel prices after retail rates achieve parity with global levels, and has proposed to cut subsidy payout by upstream firm like ONGC by half.

While the government had freed petrol price from its control in June 2010, it had started a phased deregulation of diesel rates in January last year with up to 50 paise a litre increase in rates every month.

Under-recovery, or the difference between retail selling price and its imported cost, has since come down to Rs 1.78 a litre and going by the international trend the pump rates will be at par with their cost by end of October.

"Once this happens, a proposal would be put to the Cabinet Committee on Political Affairs for deregulation of diesel prices as was done for petrol," an official said.

Deregulation would empower state-owned oil firms to change rates in tandem with cost like they do for petrol.

But before that, the Ministry is approaching CCPA for changing under-recovery burden sharing by oil firms, he said.

Currently, state fuel retailers sell diesel, domestic LPG and kerosene at government controlled rates which are way below their cost. The loss they thus make is made good by government through cash subsidy and upstream firms like Oil and Natural Gas Corp (ONGC) by way of discounts on crude oil.

The official said the under-recovery burden imposed unilaterally on upstream oil companies by the government has increased from Rs 32,000 crore (30 percent of total under-recovery) in 2008-09 to Rs 67,021 crore (48 per cent of total under-recovery) in 2013-14.

This has significantly constrained the capacity of these companies to invest in exploration for oil and gas.

Besides sharing subsidy, ONGC and Oil India Ltd (OIL) also pay Rs 4,500 per ton of cess on crude oil they produce. Recently, they have also been directed to pay 20 per cent royalty to state governments on pre-discounted price of crude oil and not post-discount rates is practice since 2008.

"Energy security of the country will be jeopardised if the funds generated by upstream oil companies are diverted to meet the under-recoveries on top of oil cess and enhanced royalty burden instead of making investment in the exploration business," the official said.

The Ministry is proposing that the fuel under-recovery be split equally between the government and upstream firms - Rs 98,622 crore estimated for current fiscal be borne in 50:50 ratio by the government and ONGC/OIL.

However, in case of ONGC/OIL their under-recovery payout would be after accounting for oil cess paid by them to the government, he said adding 50:50 burden sharing would have meant the two firms paying Rs 49,311 crore but they will now be required to pay only Rs 39,200 crore after adjusting Rs 10,111 crore oil cess paid.

The Ministry projected government subsidy payout at Rs 59,422 crore for 2014-15, lower than Rs 70,772 crore last fiscal and Rs 100,000 crore in 2012-13.

The official said considering gross crude oil price of USD 107.08 per barrel, the subsidy discount to IOC, BPCL and HPCL would be USD 35.65.

After deducting statutory levies like cess, royalty and VAT, the actual realisation for ONGC/OIL would be USD 47.15 per barrel, better than USD 32.76 a barrel that ONGC would have got otherwise and USD 32.07 for OIL.

The subsidy-sharing mechanism being proposed is based on Kirit Parikh Committee recommendation, he said. But the panel's recommendation for raising LPG and kerosene rates has been dropped.

The committee had suggested continuation of the existing pricing mechanism based on trade parity pricing.

It suggested a one-time increase in price of diesel by Rs 5 a litre and capping the subsidy at Rs 6 per litre. Besides, it wanted PDS kerosene rates to be increased by Rs 4 per litre and LPG by Rs 250 per cylinder.

Considering that the diesel under-recovery has already fallen below Rs 2 a litre, the recommendation on diesel rates has been dropped, he said.

Finance Minister Arun Jaitley had in his Budget speech last month proposed to overhaul the subsidy regime and make it more targeted while providing fuel protection to the marginalised, poor and SC/St.

The Ministry, he said, is working on a roadmap policy to implement this policy announcement for which approval of the CCPA would be sought separately.