ONGC Q3 profit falls 5 pct, subsidy costs weigh

State-run Oil & Natural Gas Corp posted a 5 percent drop in quarterly net profit, falling short of market expectations, as a sharp rise in provisions for subsidy payments offset higher selling prices for oil and gas.

The profit would have been lower but for royalty payments of 31.42 billion rupees from Cairn India Ltd that began in the quarter.

ONGC has a 30 percent holding in an oil and gas block in Rajasthan that is operated by Cairn India.

Vedanta Resources bought a majority stake in Cairn India last year and as part of the deal Cairn India is required to share the burden of royalty payments earlier paid by ONGC to the government.

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ONGC, India's second-most valuable company, reported a net profit of 67.41 billion rupees for its fiscal third quarter ended December 31, down from 70.83 billion rupees a year earlier.

Analysts, on average, had expected a net profit of 72.6 billion rupees, according to a Reuters poll of 10 brokerages.

ONGC said its discounts to state-run refiners nearly tripled to 71.72 billion rupees in the quarter from 24.04 billion rupees a year earlier.

India allows state-run refiners to set retail prices for petrol, but the government controls the prices of diesel, cooking gas and kerosene. This means producers such as ONGC must share the shortfall by selling crude to refiners at a discount.

New Delhi has said it wants to loosen control of fuel prices, but has found this difficult with global crude prices staying well above $100 a barrel most of 2011.

Because of the subsidies, the total revenue losses of India's state-run oil companies are expected to rise to $28.5 billion in the fiscal year ending March, nearly double the amount in the previous year.

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Earlier this week, the government asked upstream oil companies to share 37.91 percent of revenue losses during April-December, up from a third in the first two quarters of the fiscal year.

India is the world's fourth-largest oil importer, importing about 80 percent of its crude needs. It is scouting for oil and gas assets abroad to meet demand in a rapidly growing economy, and to feed its expanding refining capacity.

ONGC, which has been investing heavily to maintain output from its old fields, has outlined capital expenditure of 310 billion rupees in the financial year starting April 1.

The company has said it aims to raise crude oil production by 15 percent to 28 million tonnes, or 560,000 barrels per day (bpd), by March 2014.

ONGC shares ended down 1.1 percent at 283.20 rupees, while the overall market rose 0.5 percent. The stock, valued at nearly $50 billion, fell by a fifth in 2011, compared with a 25 percent decline in the main stock index.