June 24 (Bloomberg) -- Oil & Natural Gas Corp., India’s biggest energy explorer, posted an unexpected decline in fourth- quarter profit after production fell.

Net income decreased 16 percent to 22.07 billion rupees ($455 million) in the three months ended March 31 from 26.27 billion rupees a year earlier, the New Delhi-based company said in a statement today. The median estimate of 11 analysts surveyed by Bloomberg News was for a profit of 34.75 billion rupees. Sales fell 12 percent to 138.15 billion rupees.

The drop in earnings was partly offset by a decline in subsidies paid to state refiners through discounts on crude sales after the price of oil slumped from its July record. Concessions given to companies such as Indian Oil Corp., the nation’s largest fuel producer, are set to increase after oil prices began rising in February and reached a seven-month high on June 11.

“Nothing is in ONGC’s hands,” said Vinay Nair, an analyst at Mumbai-based Khandwala Securities Ltd. “It’s all determined by the government’s policy. What is in ONGC’s hands is output, but that just isn’t increasing over the last few years.”

Fourth-quarter subsidy was 8.52 billion rupees compared with 84.7 billion rupees a year ago, according to the statement.

Still, earnings from every barrel of crude the company sold in the quarter period fell to $43.4 because of the subsidies, from $49.66 a year ago, contributing to the profit drop, Finance Director D.K. Sarraf said after a presentation on the earnings.

ONGC rose 2.4 percent to 1,050.95 rupees in Mumbai trading, before the results were announced. The explorer has advanced 58 percent this year, exceeding the 50 percent gain in the benchmark Sensitive Index of the Bombay Stock Exchange.

Oil, Gas Output

Oil production declined 6.76 percent to 6.48 million metric tons, ONGC said. Gas output rose to 6.16 billion cubic meters from 6.14 billion cubic meters.

A 5.77 billion-rupee provision was made toward liability on a demand by the government for additional profit sharing in respect of a joint venture, ONGC said in the statement, without identifying the grouping. The demand has been disputed and an additional 2.8 billion rupees has been set aside for possible interest liability, the explorer said.

Profit before tax in the year ending March 2010 may not decline because of exemptions on income from fields starting production, Sarraf said. The explorer owns 30 percent of Cairn India’s Rajasthan field, scheduled to start production by July.

ONGC was given temporary exemption by the government from subsidizing the refiners in the fourth quarter after oil prices fell from their July peak. Once oil started to climb in February, a subsidy of “around 9.4 billion rupees” was imposed on ONGC and GAIL India Ltd. The exemption was reversed after crude began to rise from Feb. 12, Oil Secretary R.S. Pandey said on May 20.

State Control

Rising oil prices may increase ONGC’s subsidy burden unless Prime Minister Manmohan Singh implements a proposal to free fuel prices from state control. A plan to deregulate prices may be presented to the cabinet in six weeks, Oil Minister Murli Deora said May 29.

Output was affected by a three-day strike that ended on Jan. 9, Sharma said March 26. Production was restored three days after the strike ended, at 320,000 barrels of oil a day and 44 million cubic meters of gas daily.

Crude oil prices in New York reached a seven-month high of $73.23 on June 11. Oil for August delivery was at $68.48 a barrel at 1:12 p.m. London time.

ONGC’s subsidy bill climbs when oil prices rise above $70 a barrel, Sarraf said. The ideal range is $60 to $70 a barrel, he said.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.

Last Updated: June 24, 2009 10:15 EDT