The recent spurt in global crude prices may not translate into higher net profits

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for country’s largest oil explorer ONGC. Most of enhanced revenue flows of ONGC may go into compensating government-owned oil marketing companies (OMCs) for losses incurred on selling fuel below market cost to retail customers.

“When crude prices go up, under-recovery (of oil marketing companies) also goes up. We need to bear one-third of the under-recovery. Whatever comes as incremental revenue (by selling crude) is lost while compensating OMCs,” DK Sarraf, finance director at ONGC, said.

ONGC reported net realisation of $62.75 per barrel for selling crude oil in second quarter of present financial year. When asked if the net realisation per barrel will go up by $2-3 owing to recent rise in global crude prices, Sarraf replied, “I doubt.”

ONGC paid Rs 3,019 crore as subsidy in second quarter of 2010-11. The company’s net profit was up 5.87 per cent at Rs 5,389 crore against Rs 5,090 crore in corresponding quarter a year ago. In the first quarter of 2010-11, ONGC paid Rs 5,515 crore as subsidy to OMCs.

Dipen Shah, senior vice-president (PCG research) at Kotak Securities opined that rise in crude oil prices globally might continue for sometime.

“There are two forces acting against each other. First, commodity prices are moving up because of excess liquidity in the US market and depreciation of the Dollar. On the other side, there is no commensurate surge in demand. Economies such as that of the US, China or Europe are not growing at the same pace. Crude may go up for a while but should melt down in sometime,” shah said.

Crude futures for January 2011 on the New York Mercantile Exchange (NYMEX) have surged more than five percent in the last 10 days. Crude price was traded at $84.11 per barrel on November 30. The commodity was hovering around $88.69 on Tuesday.

ONGC scrip closed at Rs 1,332.05 on the Bombay Stock Exchange on Tuesday, up 3.95 points from its previous closing price.