Updated: December 31, 2009 19:33 IST

Agenda for oil and gas in 2010

D. Murali
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Akhil Sambhar, Associate Director, Oil & Gas Practice, Ernst & Young
Akhil Sambhar, Associate Director, Oil & Gas Practice, Ernst & Young

The current draft DTC (Direct Taxes Code) is completely silent on the provision of tax holiday for the upstream sector, rues Akhil Sambhar, Associate Director, Oil & Gas Practice, Ernst & Young. “The draft GST (Goods and Services Tax) policy also does not seek to cover the petroleum sector which could adversely impact the sector in the absence of its ability to avail tax credits on goods/ services produced which have suffered GST,” he notes, during a recent email interaction with Business Line. Given the critical importance of the oil and gas sector in India’s overall energy agenda, the provisions of DTC and GST policies should provide a robust fiscal framework to protect and encourage long term investments in the sector, urges Sambhar.

Excerpts from the interview.

At the end of 2009, where are we, as regards oil and gas policy and performance?

The initiatives taken by the Government of India (GoI) over the past decade have made significant contributions to the development and growth of the oil and gas sector in India.

The Government opened up the sector to encourage investment in the upstream sector by foreign and Indian private players, by announcing the New Exploration Licensing Policy (NELP). This has resulted in some world-class discoveries by RIL, ONGC and GSPC in the Krishna-Godavari (KG) basin, and by Cairn Energy in Barmer, Rajasthan in the last couple of years.

GoI also decontrolled the downstream sector allowing 100 per cent foreign direct investment (FDI) in the refining and/or fuel retailing sectors. This helped create surplus refining capacity in the Indian downstream sector. India currently has a combined refining capacity of over 178 mmtpa from 22 refineries.

The GoI constituted the Petroleum & Natural Gas Regulatory Board (PNGRB) in 2006 to regulate the refining, processing, storage, transportation, distribution, marketing and selling of petroleum products and natural gas. The PNGRB laid down the policy for authorisation, laying or building and operating a city gas distribution (CGD) network. Two rounds of bidding have been concluded and more than 15 cities in India have operational or awarded CGD networks.

On the policy gaps.

Despite these liberalised policies, FDI in the Indian oil and gas sector has been capped due to certain policy gaps. In the upstream sector, the NELP bid criteria and relative weighting in the present bid evaluation system gives more weight to the number of wells drilled and their depth, rather than the capabilities and technical competence of bidders. This has lead to aggressive and speculative bids in prior NELP rounds.

In the downstream sector, although the oil marketing companies (OMCs) were granted freedom to independently set retail selling prices of petrol and diesel on fortnightly basis with dismantling of the Administered Price Mechanism (APM), the fuel retail prices are still controlled by GoI.

This has distorted the playing field as the GoI gives subsidy to the public sector undertaking (PSU) OMCs. But, there is no subsidy support provided to private players. Also, the OMCs incur significant under-recoveries as the subsidy meets only a part of their costs.

The national oil companies (NOCs) – ONGC and OIL – also share the subsidy burden along with the Government, which impacts their profitability. While PNGRB has played its part as an enabler in successful implementation of CGD network expansion, it has not been granted full authority by way of complete enforcement of the PNGRB Act, 2006.

Natural gas has not been granted the “declared goods status”, and hence attracts a higher sales tax of 12.5 per cent as compared to 4 per cent available to other primary sources of energy such as crude oil and coal.

The tax holiday that was available to natural gas production under Section 80-IB(9), had also been rolled back. This has impacted the investments made by players who have been awarded blocks under the NELP bidding rounds.

Agenda for 2010.

In the coming year, we expect the Government to modify the NELP bid criteria to provide more weightage to capability and technical competence of bidders. The Government could also consider announcing the proposed open acreage policy which could gradually phase out NELP.

Although, the empowered Group of Ministers (eGoM) is in the process of re-structuring the subsidy mechanism, it should consider moving to market-based pricing of petroleum products to remove market distortion and create a level-playing field in the downstream market.

Looking at the Government’s track record of pro-sector initiatives over the past decade, we expect some of the highlighted issues to be addressed in the coming year.

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