India's new oil subsidy plan by mid-January

India plans to ease the subsidy burden on upstream firms such as Oil and Natural Gas Corp by formulating a new system to offset losses from selling cheap fuels, oil ministry sources said on Thursday.

When crude oil was above $100 a barrel, ONGC was forced to offer discounts of up to $70 a barrel to help state refiners sell transport fuels, keorsene and cooking gas at subsidized rates.

But crude oil's fall from a peak of over $147 a barrel in July, to below $40 on Wednesday limits the discount ONGC can give.

"By the middle of January, we will have a mechanism in place which would compensate our oil marketing firms," a senior oil ministry official said.

Upstream firms share one-third of the revenue losses of oil retailers by offering discounts on crude sales, while the government compensates for a larger part of the remaining losses by issuing special bonds, which the oil firms can sell.

Another official said the new system may limit the subsidy share of upstream firms to 300 billion rupees ($6.40 billion) for the current financial year ending March.

"Both upstream and downstream firms have limited capacities so they cannot be asked to share the losses in the same way," he added.

In the first half of this financial year, Indian state-refiners suffered a combined losses of 144.3 billion rupees, and their combined borrowings until November stood at 1.15 trillion rupees.

The projected annual revenue losses of the oil firms on fuel sales have declined to about 1.10 trillion rupees, from over 2.4 trillion rupees estimated in June, when global crude oil prices were over $100 a barrel.

"When crude prices were $147, we were not getting the full price," said a senior official at Oil and Natural Gas Corp.

In July-September quarter, when the ONGC's gross billing was $119 a barrel but it got only $46 a barrel.

"We could contribute toward subsidy when the prices were $140 but when the prices are today at $40 we can not contribute any subsidy ... in quarter three (Oct-Dec), we expect subsidy burden should not be more than 20-30 billion rupees," he said.