 Budget 2006-07: Energy
The energy sector, if one bifurcates into oil refining & marketing and natural gas, the prospects of the latter seem to be brighter from a long-term standpoint. While much has been talked about the dismantling of the administered pricing mechanism, in reality, the government continues to play havoc in the functioning of oil marketing companies. The regulatory regime remains unpredictable and the volatility in crude prices in the global markets has added to the woes of the sector. Read more
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Cess on petroleum crude oil under the Oil Industry (Development) Act 1974 stands increased from Rs1,800 per tonne to Rs 2,500 per tonne. |
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Tariff rate of customs duty on petroleum crude reduced from 10% to 5%. Effective rate continues at 5%. |
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Tariff rate of customs duty on petroleum products reduced from 15% to 10%. Effective duty has been kept at 10%. |
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Customs duty on naphtha reduced from 10% to 5 %. |
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Customs duty on natural gas, propane and butanes falling reduced from 10% to 5% |
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As far as the increase in levy on crude oil is concerned, the Finance Minister has specifically stated that this will be absorbed by the oil producing companies and will not be passed on to the consumers. In this sense, it is a negative for ONGC. |
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The reduction in peak customs duty, lower import duty on petroleum products (including naphtha) is likely to lower the gross refining margins of refining companies, as the protection from import duty stands reduced. |
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Post the Mr. Rangarajan committee report on pricing of petroleum products and sharing of subsidies, much was expected from the Budget proposals. However, the Finance Minister has failed to take any major steps. The reduction in customs duty on natural gas is likely to be passed on to the consumers but is unlikely to make any major difference to the profitability of companies like GAIL and Petronet LNG. Overall, the energy sector has had a dismal budget. |
| Budget 2003-04 |
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Budget 2004-05 |
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Budget 2005-06 |
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Excise duty on kerosene reduced from 8% to 4%.
50p cess on diesel to be levied to fund additional outlays on infrastructure projects.
Capital goods imports for LNG (liquefied natural gas) degasification plants customs duty reduced from 25% to 5%.
Higher thrust on concrete roads in road projects and lower excise duty on cars and CV's
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Excise duty on LNG (liquefied natural gas) exempted. Countervailing duty (CVD) exemption to continue.
2% cess levied on all taxes including excise.
No credit of cess on motor spirit, high-speed diesel and light diesel oil.
Existing exemption on naphtha/LNG used for generating synthetic gas or ammonia for manufacture of Heavy water extended to naphtha/LNG for generation of steam.
Excise duty on gas stoves with a maximum retail price of Rs 2,000 per unit reduced from 16% to 8%.
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Customs duties on crude oil halved to 5% from 10%.
Customs duties on petrol and diesel reduced to 10% from 20%.
Customs and excise duties on LPG and kerosene eliminated.
Customs duties on all other petroleum products other than above reduced to 10% from 20%.
Excise duties on petrol and diesel fixed as a combination of ad-valorem and specific duties.
Cess on petrol and diesel increased by 50 paise per litre.
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| [Read more on Budget 2003-04] |
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[Read more on Budget 2004-05] |
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[Read more on Budget 2005-06] |
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| Key Positives |
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| Steady demand growth: While demand for petrol and diesel has been volatile off late, with increased economic activity and stable prospects for the automobile sector, we believe that the same shall grow by 3% to 4% per annum in the next three years. Also, heightened activities in the domestic aviation sector are likely to boost aviation fuel demand. However, we expect naphtha substitution to increase resulting in contraction in demand going forward.
| | More competition, flexible prices: As is evident, the oil-marketing sector has witnessed private players like Reliance, Shell and Essar investing heavily in retail outlets, which is expected to force the government to re-think its current pricing policy. As in the international markets, prices are likely to become competitive and globally benchmarked. However, this is a very long-term phenomenon and to that extent, investors have to be cautious. We also expect non-fuel revenues share of retailing revenues for oil companies to increase going forward, which again is an international trend.
| | Natural gas - It is real! In the last five years, the country has witnessed significant investment outlays in the natural gas sector by both private and PSU players. The benefits of the same, though are reflected in gas finds, could actually start flowing in by FY08. We expect natural gas demand, both by the industrial sector and retail consumers, to grow significantly given that many players are expanding into natural gas distribution (CNG and PNG).
| | Tariff reduction: Rationalisation of tariffs on key petroleum products such as MS (petrol) and gradual phasing out of subsidies, is expected to provide a big boost for players in the sector, as it will positively affect marketing margins in the long term. The government has already lowered customs and excise duty on petroleum products twice and given the fact that oil-marketing companies are bleeding, we expect more reduction to cushion the blow in the future.
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| Key Negatives |
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| Government is a deterrent: Delay in the appointment of the independent petroleum regulator may hamper operational freedom and players will continue to be dependent on the government for policy related issues. With the ruling government favoring masses, economics has taken the back seat and this has adversely impacted PSUs’ profitability.
| | Crude concerns: Sharp spurt in crude prices have a negative impact on the players' margins, as product prices have a tendency to increase gradually due to political ramifications. With outlook for crude oil continuing to remain bullish, oil PSUs will have to bear significant share of subsidies.
| | Domestic refining capacity: Already, India is surplus in refining capacity and the scenario is likely to worsen in the next three years. With every oil major expanding capacity, supply is likely to outstrip demand, thus forcing players to opt for exports, which are less remunerative.
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