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Gusher of savings

28 May 2012 By Wayne Arnold

India’s oil producers could be due a windfall. The government subsidises its refiners to sell fuel to the public below cost, and forces state-owned drillers to foot part of the bill. Growing deficits make that unsustainable. Letting prices of fuel rise – and diesel in particular – would mean a boost for the likes of Oil and Natural Gas Corp. and Oil India.

Subsidies cost the government the equivalent of 2.4 percent of GDP, according to Citigroup, and have helped drive government debt to nearly 70 percent of GDP. That high debt level is beginning to be a problem. Standard & Poor’s has threatened to lower India’s credit rating and the rupee is near record lows.

India’s fuel subsidies spread the pain three ways. Refiners are effectively told at what price to sell to consumers. The state makes direct payments to refiners to keep them afloat. And upstream producers must sell to refiners at discounted prices. Petrol prices have just risen 11.5 percent, but the real subsidies are for kerosene, liquefied petroleum gas, and diesel.

The numbers aren’t small. Refiners are likely to lose as much as 1.4 trillion rupees selling those three fuels in the year ended next March 31, according to Spark Capital. The three state-owned, listed upstream producers, ONGC, Oil India and GAIL (India), will likely pay at least 40 percent of this year’s subsidies. At current prices, that will cost them about 585 billion rupees ($10.6 billion).

How much the producers could save if India cuts subsidies depends on the value of the rupee, the price of crude and how much demand falls because of higher prices. Kerosene and LPG may be off limits, since the poor use them to cook, but raising diesel by the same 11.5 percent petrol prices rose would cut India’s subsidy bill by roughly 266 billion rupees ($4.8 billion), and pump upstream companies’ projected net earnings up by almost a third.

That would translate to a roughly 21 percent boost to GAIL’s project net earnings. ONGC could see its bottom line improved by two-third. Smaller and less-profitable Oil India would see its net jump by about 88 percent. Shareholders in those three will hope India does the sensible thing and soon.



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