Energy security occupies a high priority on the government 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.

If the ongoing NELP VII is any indication, we expect the government to continue with its policies favoring exploration activities. 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 adhoc government policies.

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Industry wish list

FICCI

• Currently, the first 7 years of commercial production/refining are provided as a tax holiday under 80-IB.  Instead, flexibility to choose any 7 consecutive years out of the first 15 years.
• Alternately, tax holiday for any 10 consecutive years out of first 15 years of commercial production/refining under section 80-IA on par with the Power sector.
• Levy of service tax @ 12.36% (inclusive of education cess) on survey and exploration, site formation, mining services, etc should be abolished.
• Include natural gas in the list of 'declared goods' under section 14 of the Central Sales Tax Act in order to reduce incidence during inter-State trade.
• Streamline excise duties on MS and HSD from the current level of advalorem cum specific rates to only specific rates.
• National Calamity Contingent Duty on crude oil should be abolished. Else, CENVAT credit should be allowed on finished petroleum products.

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Budget over the years

Budget 2005-06

• 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.

Budget 2006-07

• 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
• Tariff rate of customs duty on petroleum crude reduced from 10% to 5%. Effective rate continues at 5%.
• Tariff rate of customs duty on petroleum products reduced from 15% to 10%. Effective duty has been kept at 10%.
• Customs duty on naphtha reduced from 10% to 5 %.
• Customs duty on natural gas, propane and butanes falling reduced from 10% to 5%

Budget 2007-08

• Advalorem component of the excise duty on petrol and diesel reduced from 8% to 6%.
• Infrastructure status to Cross-country natural gas distribution network, including gas pipelines and storage facilities integrated to the network, and to navigation channel in the sea.
• Extension of service tax to services outsourced for production of oil and gas.
• Custom duty on plastics reduced from 12.5% to 7.5%, while the custom duties on DMT, PTA and MEG reduced from 10% to 7.5%.
• Dividend distribution tax raised from 12.5% to 15% on dividend distributing companies.

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Key positives

Exploratory success: India has seen a spate of successful oil and gas discoveries over the past 4-5 years. This could be attributed to favourable government policies for the E&P segment. With the success of NELP, exploration acreage is increasing at a fast clip. However, a vast majority of the exploration acreage remains explored or poorly explored, which promises good potential for discoveries in the future. While India is likely to remain dependent on imports for oil; commercialization of natural gas reserves will reduce the imbalance in the demand supply scenario for the same.

Robust demand growth: Demand for petroleum products is dependent on the level of economic activity in an economy. With the Indian economy expected to register decent growth going forward, the demand for petroleum products is likely to be on the higher side. Moreover, the per capita consumption of oil products in India is one of the lowest in the world, leaving a lot of scope for demand growth.

Key negatives

Regulatory hindrances: APM (administered pricing mechanism) was dismantled in 2002, with a view to move towards market-determined prices of petroleum products. However, the subsequent steep rise in the crude oil prices had forced government to regulate the prices once again. Thus, profitability of downstream companies continues to reel under severe pressure.

Subsidy burden: Upstream players (ONGC [Get Quote], GAIL and OIL) continue to share 33% of the gross under-recoveries on the sale of sensitive petroleum products. This has constrained the growth in their profitability to a large degree. Moreover, both the upstream as well as downstream segments continue to suffer from lack of visibility due to the ad-hoc subsidy sharing mechanism.

Lower tariff protection: India has a surplus refining capacity, which is likely to further increase over the next few years due to various brownfield and greenfield projects undertaken both by public sector as well as private sector enterprises. With current favourable demand dynamics, companies are able to reap benefits from the export of petroleum products. However, with significant global refining capacities coming up, refining margins are likely to soften from the current levels. Considering the long gestation period and large investments required for setting up a new refinery, the direct margins required to cover the capital cost would be well over US$ 10/barrel (source: IOC).