Upstream oil companies, led by Oil and Natural Gas Corporation, could throw a lifeline to their struggling refining counterparts by way of a higher subsidy outgo for 2010-11.

The Centre's decision to fork out Rs 20,000 crore to IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation would only result in ‘negligible profits' for the trio. “These companies would need another Rs 4,000 crore from ONGC and Oil India to ensure that their net profits for FY 2011 are a little more respectable,” sources said.

If this goes through, the upstream sector will cough up Rs 30,000 crore as its share of subsidy to the refiners for the fiscal. The original estimate is Rs 26,000 crore, a third of the Rs 78,000 crore fuel losses incurred by IOC, HPCL and BPCL. This does not include petrol losses of about Rs 2,000 crore since it is out of the subsidised fuel list.

To put things in perspective, the Centre's compensation package to the refiners for 2010-11 works out to Rs 41,000 crore or 52.5 per cent. Assuming the upstream sector ends up paying Rs 4,000 crore for the fourth quarter, its overall share would be a little over 38 per cent.

“It remains to be seen if this actually happens but the downstream companies will be in a huge financial mess otherwise,” an oil sector official said.

The script, in that case, would be akin to 2008-09 when the oil sector literally had its backs to the wall. This was the time ONGC, Oil India and GAIL (India) parted with nearly Rs 33,000 crore as their portion of the subsidy package to the refiners. The following fiscal was easier to handle since crude oil prices fell sharply but 2010-11 has been nothing short of a nightmare.

Crude oil prices

“This was because crude oil prices have been unrelenting quite unlike 2008-09 when they plummeted from $147 a barrel to $40 towards the end of the year. No such luck is expected this fiscal and we expect oil crude to stay at the $100/bbl mark in the months to come,” the official said.

ONGC and its upstream counterparts would have reason to feel irked if they are asked to cough up more, especially when they have been opposing this one-third subsidy sharing formula.

The refiners are not particularly ecstatic about the state of affairs either because they see themselves as the victims of a distorted pricing policy.

For the moment, there is no immediate solution in sight. Petrol prices are expected to be hiked during the weekend but this is only a minuscule part of the cure. Any move to touch diesel, the bigger problem, would be catastrophic from the viewpoint of inflation. “It is a sorry state of affairs but all of us can only hope for the best,” an official said.

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