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An unclear road map worries oil and gas sector

Last updated on: July 11, 2014 20:10 IST

Budget provisions

The following announcements have been proposed in the Union Budget 2014-15

Lowering excise duty on petrol, diesel, and other fuels, branded fuels.

This is slightly positive for refinery companies like HPCL and BPCL, as most of the as the reduction in excise duty would be passed through to the customers and done to increase sales of branded petrol

An additional 15,000 km of pipelines to develop using appropriate PPP models.

This will help increase the usage of gas, domestic as well as imported, which, in the long-term will be beneficial in reducing dependence on any one energy sources. Positive for transmission companies like GAIL & GSPL

Possibility of using modern technology to revive old or closed wells will also be explored to maximize production from such fields. Positive for ONGC and OIL

Focus on increased penetration and usage of piped natural gas (PNG). Positive for all city gas distribution companies like Indraprastha Gas, Gujarat Gas, and GAIL.

No changes and announcements made on the petroleum subsidy. Marginally negative for PSU oil companies

Reduction in basic customs duty for petrochemicals and chemicals to encourage new investment and capacity addition. Beneficial for RIL only to the extent of transfer pricing, since it is fully integrated.

Production and exploitation of Coal Bed Methane reserves will be accelerated. Oil upstream companies would be the beneficiaries as it expedite development of reserves and hence will result in higher production of oil and natural gas

Introduction of GST to be given thrust.

Customs duties on mineral oils including petroleum & natural gas extracted or produced in the continental shelf of India or the exclusive economic zone of India shall not be recovered for the period prior to 7th February, 2002.

Industry Expectations

Government should clarify that for the availability of tax holiday, the definition of 'mineral oil' includes natural gas retrospectively irrespective of the NELP round and that the benefit would also be available to Coal Bed Methane

Extend the benefit under section 80-IB(9) of the Income Tax Act from 7 years to 10 years to companies engaged in production of mineral oil and natural gas. It may further be provided that benefit under section 80-IB(9) of the act shall not be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31, 2011 be extended till March 31, 2017.

Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period.

Scheme for refund of service tax paid by E&P companies on the services consumed for exploration and production purposes.

Petroleum products including crude oil and natural gas to be covered under Goods and Services Tax

Expect to issue clarification that there are no services involved among Joint venture partners including operator for execution of work for exploration and production of hydrocarbons

Effective corporate tax to be brought down to 30% from FY'15 inline with proposed provision of Direct tax code. Presently effective corporate tax is 33.99% (including surcharge @10% and education cess @3%)

Oil and gas industry to be given the status of Deemed Exporter. All the benefits applicable under FEMA, Income Tax Act, Customs and Excise and other benefits applicable to EOU are given, because this sector contributes directly in reduction of import burden for the country and the product of this sector is measured in USD and has to compete with the international prices

It should be explicitly provided that the premium paid to acquire any Exploration and Production asset abroad is intangible asset eligible for depreciation under section 32 of the Act @ 25%

Oil exploration and production companies should be exempted from the purview of MAT to promote the domestic exploration and production. This will reduce import dependence of the nation

Budget impact

Gas players into pipeline and distribution business to benrfit

Stocks to watch

GAIL,IGL, Gujarat Gas

Outlook

Union Budget 2014-15 was neutral for the oil and gas exploration and allied services industry in absence of any announcement targeted at the sector. None of the demands of the industry were met.  

 

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