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ONGC Takes Profit Hit From Royalty Payments

Indian law requires companies to pay 20 per cent of the market value of oil produced as royalty to states where oil blocks are located

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Oil and Natural Gas Corp will take a 16 billion rupee ($239 million) hit to its quarterly earnings to account for previous royalty payments to two states, the oil exploration company's finance head A. K. Srinivasan said.

ONGC has already made a 25 billion rupee payment to the two states as royalty on crude oil produced from April 2014, but had not reflected this because it was under litigation, Srinivasan said on Tuesday.

The Supreme Court has asked the federal government to compensate Gujarat and Assam for 150 billion rupees in lost revenues due to lower royalties paid by state-run explorers ONGC and Oil India Ltd.

Indian law requires companies to pay 20 percent of the market value of oil produced as royalty to states where oil blocks are located.

From April 2008 the oil ministry asked ONGC and Oil India to pay royalty based on lower prices, as the two firms had given a hefty discount on crude sales to state refiners, in order to keep a lid on local fuel prices.

However, last year the oil ministry asked the two firms to settle royalty dues from April 2014 based on the market value of oil produced.

"We have already made payments of 25 billion rupees to the state. In our accounts it was shown as advances to the two states. Now in the fourth quarter we will book this in our profit and loss account, Srinivasan told Reuters.

Despite this royalty adjustment ONGC is expected to post higher profits in the quarter to end-March due to higher prices on its crude sales. "Our average realisation would be $51-$52 a barrel", he said. Last year ONGC sold oil for $34.88 a barrel.

Separately, a government official said the federal government will settle the 150 billion rupees in instalments. "The government will pay 10-15 percent of the pending dues to the two states in this fiscal year to March," he said.


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