ONGC opposes government stake sale before issues are resolved

New Delhi: State-owned Oil and Natural GasCorp (ONGC) wants government to resolve critical issues like   fuel subsidy sharing and natural gas pricing before a planned   USD 3 billion stake sale in the company to fetch better price.   The government plans to sell 42.77 crore shares, or five   per cent of its stake in ONGC worth Rs 17,400 crore at current   prices, this fiscal.

The first disinvestments by the new government is part of a plan to narrow budget deficit to the   lowest in seven years. Commenting on the stake sale, ONGC wrote to the Oil   Ministry saying any disinvestment at this stage may not   realise the true potential/value of the company shares. 

ONGC said its payout to help fuel retailers sell diesel, domestic cooking gas (LPG) and kerosene at subsidised rates to  consumers has been steadily rising - from Rs 44,466 crore in   2011-12 to Rs 56,384 crore in 2013-14.  In 2013-14, its net realisation after subsidy payout was   a mere USD 41 per barrel of oil. Out of this, the company has   to meet cost of production, which is USD 42-44 per barrel as   well as pay statutory levies like cess, royalty and VAT.  

"ONGC has been requesting Ministry to review the existing sharing mechanism so as to ensure a minimum realisation price of USD 65 per barrel to generate sufficient cash for domestic   exploration and international acquisitions," it wrote.   The government asks upstream firms like ONGC to make good   a part of losses retailers make on selling diesel and cooking   fuel below cost. The share of upstream firms has been steadily   rising over the past years.  

While the subsidy sharing has adversely impacted its   bottomline, the non-transparent mechanism of subsidy sharing   has become a corporate governance issue, ONGC said.   "ONGC's independent directors have been expressing their   concerns on the existing mechanism. Investors have also   expressed their concern on the current mechanism. As per them,   the current mechanism is uncertain and due to which they are   not able to properly value the shares of ONGC," it wrote.  

It said the government had on January 10 notified a new   pricing guideline for natural gas as the current rate of USD   4.2 per million British thermal unit is not sufficient to   incentives companies for investment in gas business. The guidelines, which would have doubled gas price, were   to be effective from April 1 but have been put on hold by the   new government. "A sustainable gas pricing policy is required to be spelt   out by the Government of India for enhancing investment in the   gas business," ONGC said.  

Stating that the stake sale should happen only after   resolution of these issues, it wrote that "It would be prudent   that before divestment of ONGC's shares by the government, these issues are resolved so that the realisation of the  government from divestment of ONGC's shares is optimised."