Union Budget 2022-23: Domestic gas prices, as governed by the modified Rangarajan formula, have remained low for many years
Increasing demand on one hand coupled with graded increments in the production and supply on the other by OPEC+ has pushed international crude oil prices to their highest levels since 2014, currently at around $88-89/bbl as of end-January 2022. Additionally, the global upstream Capex is expected to be muted in the medium term, despite the rally in prices due to uncertainty related to long-term oil prices, a transition towards low carbon emissions, and ESG goals of large oil and gas companies.
The under-investment upstream could lead to a structural shortage of oil and gas in the future which could keep prices elevated. At higher crude oil prices, the ad-valorem cess of 20 percent limits the realisations and cash accruals of domestic upstream companies compared to the earlier fixed cess per MT. Accordingly, the upstream industry has been demanding a downward revision in cess on crude oil production to improve earnings in a high crude oil price regime.
Additionally, domestic gas prices, as governed by the modified Rangarajan formula, have remained low for many years and are at $2.90/mmbtu for H2 FY2022. At such low gas prices, gas production remains a loss-making proposition for most fields. The absence of a floor and sustained low prices as has been seen in the past few years post-implementation of the modified Rangarajan formula make exploration and production unviable even in benign geologies. Accordingly, the upstream industry has been demanding a provision of a floor for gas prices.
The Upstream oil and gas industry is characterized by high Capex requirements owing to the natural decline exhibited by oil and gas fields due to which regular Capex must be undertaken to sustain and increase production. Accordingly, one of the key demands of the upstream industry has been the exemption of exploration and development activities from the levy of GST as the latter has the impact of bloating the Capex. Further, the levy of national calamity and contingent duty (NCCD) of Rs. 50/MT on import of crude oil introduced in 2003 for one year, has remained in force since then. The industry has been demanding the removal of NCCD.
Also, the industry wants the levy of GST removed from cost petroleum, profit petroleum, and royalty as these are not payments against any service and should not be subject to GST. The incidence of GST has an adverse impact on project profitability and returns and discourages incremental investments.
The industry has also been demanding that the government clarify the eligibility to avail a tax holiday under Section 80-IB of the Act and enumerate the definition of ‘mineral oil’ to include natural gas retrospectively.
Further, the oil and gas industry has been demanding that crude oil, natural gas, and petroleum products be brought under the GST. This would enable the free flow of credits, avoid stranded taxes and reduce the burden of compliance with multiple tax laws.
To promote the use of natural gas as fuel, the industry has been demanding exempting Liquified Natural Gas (LNG) from import duty as there is a shortage of domestic gas production and nearly half the gas consumed in the country is imported. Currently, LNG attracts 2.5 percent customs duty even as crude attracts nil duty.
The author is VP and Co-Group Head-Corporate Ratings, ICRA Limited. Views are personal.