India’s got a problem with its cash cow
Putting any sort of price cap on petrol will unduly harm state-owned oil giant ONGC
Putting any sort of price cap on petrol will unduly harm state-owned oil giant ONGC |
Here we go again. The gyrations in India’s biggest state-run oil explorer, whose stock was down more than 11.5 per cent at one point, are a reminder that a nightmare investors thought was over might be resuming.
In early 2009, when global oil prices had collapsed from their pre-financial-crisis high, Goldman Sachs Group Inc caused a flutter by accusing the Indian government of taking $20 billion cash from Oil & Natural Gas Corp without consulting minority shareholders.
As the bank’s researchers noted, had such a raid occurred in a non-state-controlled company, it would have caused a corporate governance scandal. But with ONGC, the practice of forcing the company to sell crude oil to refiners at a subsidised price — $34 a barrel when Brent averaged $58 in the fourth quarter of 2008 — was just the way the Indian government did business.
That was back then. Five years later, in early 2014, Goldman put ONGC’s bonds on its most-favoured list. Whacked by the 2013 taper tantrum, India was starting to decontrol energy prices, allowing them to move more freely in line with global benchmarks.
Over the following year, the discount on ONGC’s crude sales would fall from 63 per cent of realisable value to 47 per cent. During the fiscal year ended in March 2017, the company was able to charge full price.
How much of that was reform and how much just dumb luck? The average international price during those 12 months was only $50 a barrel, which made it easy for the government to pass it on fully to consumers. With crude now hovering around $75, there’s speculation consumers — who are already paying record-high prices for gasoline and diesel thanks to bloated federal and state taxes — will be spared further increases.
One litre of gasoline now costs more than Rs86 ($1.28) in Mumbai, compared with an average price of 80 cents in New York. With general elections due next year, Prime Minister Narendra Modi won’t want political opponents to do to him what he did to them in 2014: channel public anger over soaring energy costs. But if he cuts taxes, an already wobbly fiscal arithmetic will go out of the window completely.
GST option
Another possibility may be to bring fuels under India’s new goods and services tax. It might have been feasible in 2015 to have a subsidy-free system with a 23 per cent GST on crude oil and natural gas, as well as petroleum products. But when oil prices are high, state governments won’t agree to have their juicy ad valorem revenues subsumed by a GST.
The most convenient solution is to make ONGC share the subsidy burden once again — and then pray for Saudi-Russian output increases to lower global prices. However, as last week’s shareprice reaction showed, investors don’t like the idea of a windfall tax one bit. And why should they?
The proposal that’s being discussed in the media is to saddle ONGC and other producers with a price cap of $70 a barrel. As Bloomberg Intelligence analysts Kunal Agrawal and Lu Wang have noted, this would be “irrational, excessive and unlikely”.
A windfall tax of $30 when global prices hit $100 would be almost triple China’s levy, killing investment in local oilfields and making India’s outsize dependence on imported fuel near-permanent. Worse, the tax even then would meet only half the subsidy needed to keep retail prices fixed.
Those ONGC dollar bonds that Goldman came to love tell the story. Until 2013, they lagged behind similar notes from China’s CNOOC Ltd Subsequently, as energy pricing in India struck a reformist note, creditors’ confidence in ONGC grew. Of late, though, the Indian explorer’s bonds are once again losing ground. The old fears are coming back.
The explorer’s total production can’t grow too much without new investment. The only upside for ONGC investors is the price of crude. If that’s fixed, then there’s no reason to own its shares.
In that case, ONGC shouldn’t even be a public company.
India’s government and a clutch of state-owned companies already own 87 per cent. New Delhi should buy the rest of the stock and help itself to as much of its cash as it wants. Goldman won’t complain.