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Budget 2013: What the oil and gas sector expects

Indias oil and gas sector, often regarded as the countrys growth engine, has grown by leaps and bounds over the past decade, but the quest to reach the top of global league remains a challenge because of rising underrecoveries and lack of policy incentives. The sector is a key revenue earner for the central and state governments. In 2011/12, it contributed 2,327.69 billion rupees to central and state governments in taxes, accounting for 20.6 percent of total indirect taxes. At a time when the government earns a chunk of its revenue from the oil sector, the finance minister should consider including in Budget 2013 proposals to lower or exempt the sector from various taxes. The recent announcement of a partial deregulation of diesel prices, with market-linked price for bulk users and graded increase in retail prices till price parity, is a welcome move. However, the need of the hour is complete deregulation of fuel prices and allowing market forces to set the benchmark in tandem with global oil prices. Once price parity is reached between retail and market prices, it will not only benefit consumers by offering them a choice, but also help in managing diesel demand and mitigate the substitution of various products of industrial consumption such as fuel oil and naphtha with diesel.

It will also be good for the economy, since a ballooning subsidy bill was threatening to derail overall fiscal discipline. Private oil marketing companies have invested substantially in setting up retail outlets, but due to lack of a level playing field, these assets are underutilised. The private sector operates about 2,000 outlets mostly in highways and rural India, providing direct employment to between 15,000 and 20,000 people. A level playing field for the private sector would help invigorate the local economy. The industry wants the government to remove the National Calamity Contingent duty (NCCD) on crude oil levied at 50 rupees per metric ton, which was imposed on domestic and imported crude oil in the 2003/04 budget. The levy was to provide support to relief work in areas affected by natural calamities and was supposed to have been removed the following financial year. It has put an additional burden on oil refining companies. The industry has been asking for a waiver on customs duty on import of materials such as pipes, valves, flanges and data communication systems used by oil companies for laying gas pipelines and petroleum products. A reduction in excise duty on branded high speed diesel (HSD) and motor spirit (MS) products has been sought in line with unbranded HSD/MS. Marketing of premium branded products, which help save energy and prolong the vehicles life, has virtually come to a standstill, something that is not in the interest of a nation which imports nearly 80 percent of its oil requirements. The current policy, subjecting the services consumed by E&P entities to service tax, drains a substantial part of the funds committed for exploration, reducing funds available for actual exploration activities. Crude oil/natural gas produced by E&P entities is not subject to excise duties. Hence, they cannot take CENVAT credit of service tax incurred for exploration and production of crude oil/natural gas. The government should come up with a scheme for refund of service tax paid by E&P entities on services consumed for exploration as well as production purposes. Or not charge any tax on services provided to E&P entries

OMCs expectations from Budget 2013

Experts feel that oil and gas sector will be given great importance in Budget 2013. Speaking on the recent hike in diesel prices by 45 paise per liter, experts said that the hike was way too low as partial de-regulisation of the diesel would not solve the problem. Oil and Gas expert, Kirit Parekh said that the hike was too week and that the government needs to act more aggressively in the oil on gas sector as prices need to be successively increased by 40-50 paise per month. "Keeping in mind the recent increase in the prices of world crude oil by one and half rupees, government is way too behind the international price and partial increase will not de-regulate any subsidy," said Parekh. Citing similar views, former ONGC chairman R S Sharma said there is a distinct need to align process of diesel with international prices because under recoveries are becoming unmanageable. However both the experts agreed that the issue of price hike was highly sensitive but hoped that government will continue to increase the diesel prices amid serious apprehensions from other political parties.

Moving on further, experts also said that exploration sector also needs to be given due importance. "With PSUs making investment outside the country, government needs to encourage investment in the country itself as it would promote employment and support investment and the economy in our own front," Sharma said. Sharma added that setting prices of energy sector on order should be brought on track and said that coal needs to be denationalizes or it will become a huge bottle neck in the economy Limited coal supply creating hurdles for power sector, Sharma said, government needs to urgently de- nationalize the sector, eliminate the monopoly of Coal India and let the private players come in.


Chairman BPCL

The hike, which is likely to be announced soon, will reduce our losses by Rs 300 crore. Since the hike will be marginal, it will not impact consumers.

Pre-Budget expectations of oil & gas sector

Although the last year witnessed the global economic meltdown impacting major economies of the world, the Indian economy largely withstood it. The oil & gas industry has been instrumental in sustaining the growth rate of the Indian economy. The petroleum & natural gas sectorwhich includes transportation, refining and marketing of petroleum products and gasconstitutes over 15% of the countrys GDP. Other than this, it also acted as a critical element in propelling other sectors of the economy. Financial year 2009-10 has been a landmark one for additional production of oil & gas in India. Commencement of crude oil production by Cairn Energy in Rajasthan, large oil discoveries by Reliance in the Krishna-Godavari basin and improved oil recovery projects by oil companies have supported the growth to a larger extent. The increased production will help reduce the countrys oil imports, saving foreign exchange and

leading to higher economic development and an increase in the GDP growth rate. India's domestic demand for oil & gas is on the rise. According to the petroleum ministry, demand for oil & gas is likely to increase from 186.54 million tonnes of oil equivalent (mmtoe) in 2009-10 to 233.58 mmtoe in 2011-12. With Nelp-VIII, the overall number of blocks brought under exploration has exceeded 200, enhancing the oil production. The development of the oil & gas sector leads to energy security, employment and welfare of the community. With the Budget around the corner, the sector looks forward to fiscal incentives that would boost the sectors capital outlay. This can extend to the hitherto untapped areas and also to those areas that have a lower probability of striking oil reserves. In addition to the optimisation of tax holiday by providing flexibility to claim it in a block of 10-15 years, a weighted deduction of, say, 150% of the actual expenses incurred in respect of exploratory cost should be provided. Further, the tax holiday available for profits from the production of natural gas from Nelp-VIII blocks should be extended to pre-Nelp and CBM blocks. The industry hopes that the application of MAT provisions would be suspended during the tax holiday period. The longstanding demand for the removal of the service tax on the services utilised by E&P companies needs to be addressed. The service tax is imposed on the input used by E&P companies, but since there is no output service tax or excise duty liability against which they can claim credit, this increases the cost burden. The industry looks forward to the declared goods status for natural gas. It would apply a lower sales tax rate on industrial goods, as against the present prevalent rate that varies from state to state between 12.5% and 20%, except in Rajasthan where 4% tax is levied. Looking at the volatile trend of crude oil prices and under-recoveries made by oil marketing companies (OMCs), the time is ripe for the government to take the right move in the sector. More so in light of the Parikh Committee report that has recommended deregulation in the pricing of transport fuel. Given the impact on inflation deregulation might have, it would have to be blunted by the right set of monetary policies.

IIFL Budget Preview 2013-14: Oil & Gas

Expectation Probability Implications Reinstate 5% custom The move could be made to increase the duty on crude oil and Low government revenues, positive for Cairn increasing excise duty on and negative for refining companies petro products Clarity on domestic Positive for Gas producers RIL, OINL, natural gas pricing ONGC and negative for gas consumers (implementation of High like GAIL, IGL. However as production Rangarajan Committee volumes start increasing transmission recommendations) companies expected to start benefiting Exemption of the 5% import duty on LNG in To increase affordability of LNG and all LNG consumer High thereby beneficial for Petronet LNG, sectors (presently GAIL, GSPL, IGL, GUJGAS exemption only in power sector) Clarity on FY13 subsidy Would indicate the sharing pattern for High sharing formula FY14 Extend the tax holiday to natural gas sector It would help improving investment (presently 7-year tax Medium climate in the E&P of domestic gas in holiday given to crude the country oil E&P projects) While the benefit has expired in March Tax holiday on refining end 2012, many grassroot refineries and projects to be extended expansion projects are undergoing. Such Medium till end of 12th five year tax concession extension would support plan (2012-2017) their viability and would benefit HPCL, BPCL, IOCL, MRPL Increase on import duty on polymers like PVC, PE from 5 to 7.5% It will make local petchem production and/or Removal or Medium viable by making the spreads more reduction of import duty comparable with the imported polymers of all petchem inputs (current rate 2.5%-10%) Current sales tax/VAT is 12.5-20% and Declared goods status for on back of declared goods status the Low LNG and natural gas same rates would be reduced to 5% improving the affordability of LNG.

Oil and Gas Sector

Rising crude prices have resulted in mounting under-recoveries for oil marketing companies (OMCs), which are expected to be over 166,224cr in FY2013. Angel expects the budgetary measures to be focused on addressing oil under-recoveries by way of providing clarity on subsidy sharing formula for upstream oil companies. A concrete subsidy sharing formula would provide visibility over earnings of upstream oil companies and hence, it would be positive for them (ONGC, Oil India and GAIL). The government is likely to re-introduce 5% customs duty on import of crude oil which will be positive for Cairn India.

What the gas industry wants from the budget

Players in the natural gas segment would like Finance Minister P. Chidambaram to realise that gas, whether locally produced or imported, can be a viable substitute for crude oil and key to accelerating India's growth rate. They are hoping for tax breaks in the coming budget, and in particular, parity in tax rates with crude oil. With a transition to goods and services tax (GST) in the offing, these players - which include the oil marketing companies - want gas to be in the list of products covered by GST. But states, which earn a large chunk of their revenues from taxing oil and gas, do not want to lose exclusive taxation rights. The encouraging news is that Chidambaram too has been trying to convince states to allow oil and gas to be brought under GST.

India wants to reduce its dependence on oil by shifting further to gas. The petroleum ministry hopes to increase import capacity, currently at 12.5 metric tonne per annum (MPTA), including the newly commissioned Dabhol terminal with five MTPA capacity, by more than five times by 2016. Following the shale gas boom in the United States, there is a huge amount of gas available for sale in the international markets, and prices have also fallen from $16-$17 per unit to $9 to $11 for delivery on India's west coast. The last budget provided tax exemption on gas to those power companies which imported it to fuel their own power terminals. But this was impractical. There are hardly any power companies in the country which have the facilities to import gas and use it. Gas importers want a blanket exemption for all of them, so that the benefit can be passed on to consumers across sectors, be they fertiliser companies, city gas networks or other industries. City gas network also have to pay local taxes. Gas companies want a tax break to be given here as well, by categorising gas as 'declared goods' under the central sales tax act. 'Declared goods' are those

of special importance in interstate trade and commerce. Other fuels such as crude oil, liquefied petroleum gas (LPG) and coal are already categorised as declared goods.

The last budget emphasised developing the national gas grid, but differences over taxes has made progress difficult. Thus pipeline network companies such as GAIL would like tax concession to lay cross-country pipelines. They point out that telecom equipment has been getting such a concession since 2002. They are keeping their fingers crossed, hoping the finance minister will listen to them.