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Budget 2011: Energy
2010 has been a crucial year for Indian energy sector as oil and gas industry witnessed long awaited reforms like deregulation of petrol prices and substitution of oil bonds with cash subsidies. However, the sector is still in dire need of further policies like diesel price deregulation and a clear subsidy and royalty sharing mechanism. The lack of the same has led to the delay in disinvestment plans of oil marketing companies and has brought Cairn Vedanta deal to a deadlock. While India still imports more than 70% of crude oil, it is oversupplied market in downstream segment. The OMCs are already incurring huge under recoveries. If crude prices remain high, the situation will only get worse as new refineries start commissioning. On the other hand, there is a huge scope for investment and consumption in the gas sector and India’s venture into shale gas exploration has further boosted its prospects.
With so many issues waiting to be resolved and Indian energy sector’s future hinging on them, there are a lot of expectations from the energy sector budget as outlined below
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The oil and gas sector expects that ‘mineral oils’ be redefined to include natural gas and coal bed methane (CBM). This will extend to them the benefit of tax holiday for past and future rounds of production. This will also boost interest and participation in NELP rounds. |
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There is also a proposal to exempt all Exploration and Production (E&P) income from Minimum Alternate tax. |
| Downstream |
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It is unlikely that Government will deregulate diesel prices due to high inflation levels and forthcoming state elections. Rather, it may slash taxes and duties on refined petroleum products and crude oil to ease the under recoveries burden for OMCs. |
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For the first 9 months, the Government has borne 45% share in the under recoveries. This is more than seven times the budgeted amount and up 68% YoY. The rest of the under recoveries were shared by OMCs and upstream companies in the ratio of 22% to 33%. It is expected that the subsidies will be continued. However, the Government may choose to offer a fixed subsidy on a litre of diesel. Beyond this limit, the costs will be passed on to customers by OMCs. We also expect some clarity on sharing of subsidies between different stakeholders as this will be a key consideration for valuations on proposed share sales of IOC and ONGC.
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The Government will stop issuing oil bonds in lieu of subsidies. All subsidies related to oil would be directly brought into the fiscal accounting. |
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Surcharge on domestic companies reduced to 5% from 7.5% |
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Increase in the rate of Minimum Alternate Tax from 18% to 18.5% of book profits.
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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. |
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Reduction of surcharge will aid the profitability of domestic oil companies. |
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The downstream segment would be disappointed as there was no clear announcement on the deregulation of diesel prices.
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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. |
| Higher Minimum Alternate Tax on book profits will impact Reliance Industries
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