ONGC BRACES FOR A PROFIT SHOCK

TROUBLE IN THE PIPELINE

At a time when its global peers have posted record profits, the govt's move to ask for more money to make good retailers'losses will hit oil major hard

INDIA'S largest producer of crude oil, ONGC, could report a drop in its profits for 2008-09, with the government planning to ask the company to stump up yet more cash to make good the losses of fuel retailers IOC, HPCL and BPCL, a person familiar with the matter said.
    The drop in profits would paint an unflattering picture of the Indian blue-chip company among its global peers, especially names such as Chevron and ExxonMobil, which have posted record profits in 2008, helped by the rally in crude oil prices to a record high of near $147 per barrel in July last year.
    Any move to ask ONGC, in which the government holds a 74.14% stake, to bear more of the consumer subsidy on fuels could hit the company's plans to go in for deep-water exploration in the KG Basin, where it proposes to dig deeper than any existing deep-water well in the world, according to a director on the company board. Oil exploration in deep waters is an extremely capital-intensive activity.
    The government's moves have not gone down well with the investors in the company, and questions are being raised by independent directors as well as representatives of foreign funds, said the person, who did not wish to be identified.
    Critics of the practice say that the government is setting the wrong example in corporate governance, trampling over the rights of minority shareholders.
    ONGC chairman and managing director RS Sharma declined to comment on the issue or on the concerns which have been raised by the investors. ONGC's subsidy share at Rs 30k cr
THE company has, for long, met a part of the subsidy bill on diesel, petrol, kerosene and cooking gas by selling its crude at discounted prices to public sector oil companies that refine crude and retail fuels. While the average crude oil price for the Indian basket of crudes in April-December 2008 was $99.76 a barrel, ONGC sold its crude to state-owned Indian refiners — IOC, HPCL and BPCL — at a nearly 51% discount at just $49.31 a barrel.
    Subsidised crude reduces costs for these refining-cum-retailing companies, lowering their losses incurred in selling fuel to consumers at statedetermined prices far below those warranted by global crude prices.
    ONGC, which should have seen a healthy growth in its profits in the last financial year, has already shelled out close to Rs 30,000 crore, as its share of the subsidy bill in the oil sector. The total subsidy bill for 2008-09 has been estimated to be around Rs 1,03,182 crore, a little under 2% of GDP.
    The government is now making an all-out effort to provide additional compensation to the state-owned fuel retailers, which otherwise would be in the red, a person with knowledge of the situation said.
    The government's last minute bailout package, which comes days ahead of these retailers posting their annual results, could include additional oil bonds of around Rs 10,000 crore and extra subsidies from oil producing companies like ONGC, OIL and gas transportation company GAIL India. (Oil bonds are tradable government bonds that the government gives to oil companies in lieu of cash from the Budget to compensate them for losses on fuel).
    In the fiscal third quarter to end-December, ONGC sold oil at $33.99 per barrel, a discount of 42.6% to the average Indian basket price of $59.02 per barrel, which dragged its profits 43% lower.
    Goldman Sachs, which has been critical of government's subsidysharing agreement and ONGC's corporate governance standards, sees the company continuing to shoulder the subsidy in the fourth quarter too.
    "We think that ONGC will eventually have to pay a subsidy in 4Q of FY09, given the government's reluctance to issue more oil bonds despite the oil marketing companies' (OMCs) suffering from additional high interest costs, inventory loss and mark-to-market losses (Rs 50 billion) on oil bonds in FY09," Goldman said in a report dated May 7, reiterating its 'sell' rating on the stock.
    It had earlier alleged that the government had taken $20 billion from the company on an "ad-hoc basis".
nishanth.vasudevan@timesgroup.com 

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