ONGC and OIL paid Rs 2,560 crore and Rs 1,150 crore respectively to the state governments on account of royalty difference between pre-discount and post-discount prices for onshore production since February 2014.
royalty liabilities of Rs 15,700 crore and Rs 10,400 crore, respectively, for production from April 2008," it said.
In July last year, the central government directed ONGC and OIL to pay royalties to all crude-oil-producing states at pre-discount prices on onshore production since February 2014.
Consequently, ONGC and OIL paid Rs 2,560 crore and Rs 1,150 crore respectively to the state governments on account of royalty difference between pre-discount and post-discount prices for onshore production since February 2014.
Based on this, the likelihood of the government requiring ONGC and OIL to pay the entire claimed amount did rise at the time.
However, the central government has now decided to pay the remaining royalty claims for production between April 2008 and January 2014. "The amounts already paid, which have been treated as deposits by the companies, will no longer be recoverable and will lower the companies' pre-tax incomes for the fiscal year ending March 2017 by the respective deposit amounts," Moody's said.
Since October 2015, the central government hasn't asked ONGC and OIL to provide discounts, given low oil prices and consequently low fuel subsidies.
"Thus, there was no difference between pre-discount and post discount prices, and no additional royalty claim on onshore production since then," it said.
If Brent crude-oil prices increase and stay above USD 60-65 a barrel for a prolonged period of time from USD 56 per barrel as of February 21, ONGC and OIL may be asked to share the subsidy burden once again and there will be a difference between their pre-discount and post-discount prices.
"If ONGC and OIL are asked to pay royalty on pre-discount prices in future, it will reduce the companies' profitability.
The impact on OIL, in such a case, will be more negative than ONGC because OIL derives its entire production of crude oil in India from onshore blocks whereas ONGC derives less than half of its production of crude oil in India from onshore blocks," it said.
However, Moody's expected that the Centre will determine the share of any future subsidy burden after taking into account the difference in royalty claims of ONGC and OIL.
Thus OIL's share of subsidy per barrel may be lower than ONGC's to compensate it for higher royalty payments.
"Over the next 12-18 months, we expect the fuel subsidies to remain low as we expect the oil prices will not increase and stay above USD 60 per barrel for a prolonged period of time. Thus, the royalty issue will not be a concern for at least next 12-18 months," the report added.
(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)
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