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Nations cut taxes to help oil firms, India stays put

with taxes and levies in India remaining the same while realisation from crude sales falls, oil producers here have no option but to slash capex plans.

The vertiginous fall in crude oil prices has forced many countries to cut taxes and levies on hydrocarbon production and exports, but India’s stiff imposts have only turned more onerous for explorers here.

As gathered by consultancy firm Wood Mackenzie, countries like the UK, US, Colombia, Australia, Russia, Kazakhstan and Argentina have in recent weeks given a helping hand to their oil producers and exporters through steps such as reduced export duty

and petroleum revenue taxes, removal of carbon tax and even cuts in the corporate tax rate.

However, with taxes and levies in India remaining the same while realisation from crude sales falls, oil producers here have no option but to slash capex plans. In the case of nominated blocks, for instance, the oil cess, which was raised 80% to Rs 4,500 per tonne in March 2012, accounts for a huge 25% of the gross realisation from sale of crude oil at present, with Brent crude at $36 per barrel. When crude was hovering around $100 per barrel in early 2004, the cess worked out to be only 10% of the gross realisation. Analysts suggest the cess could be made an ad valorem levy, given the volatility in the crude market.

India’s oil producers like ONGC and Cairn India, as reported by FE earlier, have cut capex plans given the depressed global oil prices which, many analysts believe, could plunge further given likely supply increases from the US, Russia and Iran. Many believe that state-run ONGC may put in abeyance further development of the much-touted deepwater block KG-DWN-98/2 in the Krishna Godavari basin, which entails an investment to the tune of $6-7 billion to pump out oil and gas by 2018. Similarly, Cairn India’s FY16 capex plan could be slashed by a steep 40%, in what could accelerate the fall in output from the country’s largest onshore oil block at Barmer in Rajasthan.

Exploration and production (E&P) players in India are subject to royalty, profit petroleum (for blocks auctioned under NELP regime), cess (for pre-NELP blocks and nominated blocks), service tax, VAT, and National Calamity Contigent Duty (NCCD) etc.

Of these, the cess has proved most onerous for the industry as it was hiked to Rs 4,500 per MT from Rs 2,500 per MT in March 2012. While the cess was  10% of the gross realisation when Brent crude was ruling above $100 per barrel, it is now close to a quarter of the realisation.

Industry (Development) Act, 1974, provides for collection of cess as a duty of excise on indigenous crude oil. Cess incurred by producers is not recoverable from refineries and thus forms part of the cost of production of crude oil. The cess was levied at Rs 60 per tonne in July 1974 and subsequently revised several times.

While NELP blocks, including Reliance Industries’ KG-D6 block on the east coast, are exempted from cess, pre-NELP discovered blocks like Panna-Mukta-Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne. Royalty is charged at 12.5% for crude oil from onland areas and 10% from offshore areas from the blocks awarded under NELP auction. The royalty on natural gas is levied at 10%.

“This coupled with other levies and operational expenditure, which may not commensurately fall with oil prices, leaves very little at the net level for the affected players. Hence, it may be imperative to make cess an ad-valorem levy, which moves in line with the oil prices for the industry to make meaningful cash generation in this high-risk industry. Barring that, the firms may have to borrow to sustain capex or curtail the capex, both of which may not be in the interest of the industry and the country over the long term,” said K Ravichandran, senior VP and co-head, corporate sector ratings, Icra.

Officials told FE the petroleum ministry favoured levying cess on ad-valorem basis, although the finance ministry would have to take a final call.

“Oil explorers such as ONGC and Oil India have shared oil subsidy bill when crude oil prices were high. Now, the scenario has reversed and government may consider giving them sops as their revenues are hit after crude prices have plummeted to an 11-year low. In the short-term, the government may not have much leg room to offer tax sops, but it could reduce the royalty or cess rate,” said Salil Garg, director, India Ratings & Research. PetroFed, an association of oil and gas companies, recently wrote to revenue secretary Hasmukh Adhia and petroleum secretary KD Tripathi seeking levy of 8% cess on the price of crude oil realised.

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