The week gone by was a forgettable one for public sector companies in the oil upstream sector, and with good reason. Whispers that the government planned to do a ‘Brutus' soon saw them being whipped on the bourses. On Friday, the government did just that. It raised the subsidy burden to be borne by upstream companies (ONGC, Oil India and GAIL) for fiscal 2011 from the repeatedly promised cap of 33.3 per cent to 38.7 per cent. This move could spell trouble for ONGC's already postponed follow-on offer proposed to be launched later this year. As it is, there have been loud concerns about the unfair treatment being meted out to minority shareholders in public sector oil companies.

The forced sale of high-volume fuels far below cost, an uncertain-till-the last-minute subsidy sharing mechanism, and consequent lack of earnings visibility have contributed in large measure to the continued under-performance of both downstream and upstream PSU oil stocks. Now, added to this concoction is the spectre of the Government not living up to its word of restricting the upstream subsidy burden.

Investors disappointed

With this latest display of ad-hocism, the Government has forfeited its credibility. In the bargain, upstream companies stand to earn less per barrel of crude oil. Ironic, considering the recent steep increase in crude oil price, should have translated into a bonanza for companies such as ONGC and Oil India. Investors sure have a reason to feel short-changed and disappointed.

The Government's action perhaps also reflects its desperation and cluelessness in tackling the fuel pricing conundrum. Price hikes inevitably invite vociferous protests, carry the risk of fanning inflation, and can be politically disastrous. Not compensating downstream companies (Indian Oil, BPCL and HPCL) sufficiently could sink them into the red. Shifting more of the load upstream could run the risk of crippling companies vital to the country's energy security, not to mention spooking investor sentiment. And lastly, if the government took on more of the burden, its fiscal deficit targets could be thrown out of whack.

Many practical solutions

Clearly, the Government has a tough juggling act to perform. Of bigger concern now is the road ahead. Thanks to runaway crude prices in the recent past, the projected fuel subsidy figures for FY-12 (around Rs 1,80,000 crore) make the numbers for FY-11 (around Rs 78,000 crore) seem like chicken-feed. Unless the Government gets its act together, the finances of the oil companies, and indeed that of the country, seem headed for serious trouble.

The Government should move quickly to implement the neglected recommendations of many eminent economists. The latest in this list is the Kirit Parikh Committee, whose report last year had suggested many practical solutions, including graded subsidy sharing mechanisms, to handle the vexed fuel pricing issue. A commitment to reforms, transparency, and lack of ad-hocism are key to assuaging investor sentiment about the public sector oil company stocks.

For its part, the Government could do its bit by moderating the high taxes on the subsidised fuels. Meanwhile, it should also implement dual pricing for diesel, which accounts for the bulk of the subsidy burden.As the oil companies have time and again pointed out, it is perverse to subsidise fuel for users of SUVs and other fancy cars, while continuing to penalise oil companies for no fault of theirs.

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