Given that India imports more than 70% of its oil and gas requirement from outside, energy security is a high priority item on the government's agenda. In order to accelerate hydrocarbon discoveries, increased emphasis has been laid on E&P through several rounds of NELP. They have yielded benefits in the form of huge gas discoveries in the KG basin and oil discoveries in Rajasthan. Greater clarity on the taxation of natural gas production will go a long way in incentivising domestic production. The midstream segment will be a direct beneficiary of increased volumes. Thus, prospects of the upstream and midstream oil and gas sector look bright.
The downstream segment however, continues to suffer on account of government regulations. Till a sustained reduction in the crude oil prices is observed, the prospects of the oil marketing companies largely hinge on ad hoc government policies. The Union Budget 2010 has not adopted the recommendations of the Kirit Parikh committee on fuel pricing and has in fact rolled back some of the excise and customs cuts given last year.
Budget Measures
Restoration of basic customs duty of 5% on crude oil, 7.5% on diesel and petrol and 10% on other refined products
Increase in central excise duty on diesel and petrol by Rs 1 each
Decision on pricing of petroleum products based on the recommendations of the Kirit Parikh committee deferred
Government subsidy to oil companies to be given in cash instead of issuing oil bonds
Full exemption from basic customs duty is provided to compostable polymers
Surcharge on domestic companies reduced to 7.5% from 10%
Increase in the rate of Minimum Alternate Tax from 15% to 18% of book profits
Budget Impact
The upstream segment still does not have clarity in the subsidy sharing structure. With the government opting to switch to cash subsidies instead of the oil bonds earlier, it will not be surprising to see a higher share of subsidy burden on the upstream companies.
Domestic refining margins will be impacted as the input cost of crude oil will go up due to higher customs duty.
The downstream segment would be disappointed as there was no clear announcement on the deregulation of fuel prices. However, we will have to wait and watch if the recommendations of the Kirit Parikh committee are implemented.
Fuel prices are also likely to go up due to the rollback of custom duty. This will increase transportation costs and add to the price rise in a host of basic items.
Company Impact
Upstream energy companies such as ONGC, Oil India and GAIL will be weary at the prospect of sharing a higher subsidy burden if the under recoveries of downstream companies are not reimbursed by the government.
The refining margins of Reliance Industries, Indian Oil, BPCL and HPCL will be adversely impacted from the hike in customs duty on crude oil.
The public sector oil marketing companies (OMCs) - Indian Oil, BPCL and HPCL - will continue to face under recoveries as the recommendations of the Kirit Parikh committee on fuel pricing have not be adopted as yet.
Higher Minimum Alternate Tax on book profits will impact Reliance Industries.
Given that India imports more than 70% of its oil and gas requirement from outside, energy security is a high priority item on the government's agenda. In order to accelerate hydrocarbon discoveries, increased emphasis has been laid on E&P through several rounds of NELP. They have yielded benefits in the form of huge gas discoveries in the KG basin and oil discoveries in Rajasthan. Greater clarity on the taxation of natural gas production will go a long way in incentivising domestic production. The midstream segment will be a direct beneficiary of increased volumes. Thus, prospects of the upstream and midstream oil and gas sector look bright.