BUSINESS LINE ARTICLE

Much of the budget wish-list of the oil and gas sector has gone unfulfilled. There was no clarity provided on subsidy sharing, no relaxation or extension of the tax holiday clauses, no exemptions from service tax, and no hike in the price of controlled fuels which would have moderated under-recoveries. This could mean continuing profit pressure on both the oil marketing companies (Indian Oil, BPCL and HPCL) and upstream oil companies (ONGC and Oil India). GOOD FOR GAS But there was some consolation for gas companies. Their demand to exempt gas imports from customs duty, similar to crude oil imports, has been partially met. Natural gas and liquefied natural gas (LNG) imported for power generation by power generation companies has been exempted from basic customs duty in the budget. At present, the customs duty rate is 5 per cent. Imported spot LNG currently costs $13-$14/mmbtu compared with the $4.2/mmbtu for most of the country's domestic gas. While the cheaper imports will primarily benefit gas-based power plants that depend on imported gas, it should also aid to some extent gas importers and regassifiers such as Petronet LNG and Shell. Gas transmission companies, GAIL and GSPL, which procure gas cargoes and transport them to customers would also benefit from the expected increase in off-take from power producers. Also, with oil and gas storage facilities, and oil and gas pipelines being made eligible viability gap funding, gas companies should benefit. HIGHER COSTS For oil companies, the budget instead of providing relief on the burgeoning under-recoveries, has added to cost. The increase in cess

on crude oil from Rs 2500 per tonne to Rs 4,500 per tonne will raise the production costs of oil explorers ONGC, Oil India and Cairn India. Not surprisingly, these stocks came under heavy pressure on the bourses, declining between 4.5 and 6 per cent in Friday's trade. The provision for petroleum subsidy (Rs 43,580 crore) in the budget also seems inadequate, going by prevailing high crude oil prices (Brent above $120 a barrel) and the experience of last year, when actual subsidy far exceeded the budget estimate. What though may provide respite to the oil sector is quick and effective implementation of the proposal to directly transfer LPG and kerosene subsidy benefits to intended recipients through the UIDAI mechanism. The budget also has a provision to exempt payment to certain foreign companies in India in Indian currency for import of crude oil. While the intended beneficiaries have not been explicitly mentioned, this provision would enable ease of crude oil imports from Iran. This would aid refiners such as MRPL, which depend on Iran for the bulk of their requirement.

ECONOMIC TIMES ARTICLE MUMBAI: Despite a rollback of customs duty on imported gas or LNG and an extension of viability gap funding for various oil and gas installations, pipelines and LNG storage terminals, industry insiders see the as lacklustre. Senior officials say they had expected complete deregulation of diesel, more freedom to revise petrol prices, abolition of excise duties and special duties prevailing on branded fuels. So, oil PSUs continue to be a worried lot, as they believe that the Budget did not do anything special for the sector that is reeling under one of its worst financial crisis, hit by a triple whammy of high crude prices, the government's steadfast refusal to deregulate fuel prices and the obvious under-recoveries that are threatening to bankrupt oil PSUs. The ongoing Iran crisis is the latest nail in the sector's coffin as its diplomatic tensions with the US and EU have pushed up international crude prices to a record $120 a barrel, which in turn pushed up India's average crude basket to $118. Not surprisingly, for the year ending March 31, 2012, the projected under-recoveries to be borne by oil PSUs is close to Rs 1,40,000 crores. Thus, total losses on this account to be borne by the state refiners this fiscal is expected at Rs 1.32 trillion compared with Rs 78,190 crore last year, according to the petroleum ministry. In the nine months ended December, it stood at Rs 97,313 crore. The overall impact gets grimmer when one takes a close look at the immediate scenario where OMC's incur a loss of Rs 13.55 per litre of diesel, Rs 439 per LPG cylinder, Rs 29.97 per litre of kerosene and Rs 6 per litre of petrol. All of this totals up to a daily loss of Rs 465 crore for the OMCs. A vicious cycle especially when India's crude oil import bill for the first nine months of the current fiscal 2011-12 shot up by 49% to Rs 469,993 crore, so OMCs say they may witness a 50% jump in losses

in

FY12-13

due

to

selling

subsidised

fuel.

Reacting to the reversal of customs duty on LNG, company sources said it's a very positive move given the industry's growing dependence on imported gas in wake of the declining natural gas production in the country, primarily due to steep fall in gas production at Reliance Industries D6 block in Krishna-Godavri basin, the country's largest gas reservoir. According to industry estimates, the two existing terminals at Dahej and Hazira and the Dabhol terminal, which could be commissioned by March-end, will receive around 250 LNG cargoes and the customs duty at the existing rate will be around Rs 2,500-3,000 crore. At present, the two operating LNG terminals in the country - Petronet LNG's Dahej terminal and Shell's Hazira terminal - are importing about 13 million tonne (mt) annually. While Petronet's terminal is running at excess capacity of around 11 mt (terminal capacity is 10 mt), Shell is running at full capacity (of 3.6 mt) and is also in the process of increasing it to 5 mt. Also new terminals are coming up - Petronet's Kochi terminal (5 mt) and Dabhol LNG terminal (5 mt) - which will lead to further rise in imports. On the viability gap funding, company executives said they need more clarity on exactly who will be helping out with additional funds, whether it's the government or state-owned banks and what exactly will the entire methodology entail. They said it's a welcome move given that most lenders and investors are wary of pumping cash in the Indian oil and gas sector which is affecting key projects.

Given the role oil & gas sector plays in the development of any economy, the industry had significant expectations from the Budget of 2012-13. On the contrary, there has not been much stimulus to the sector in the current budget. The refining sector has seen significant investments in the last few years which has made India a net exporter of petroleum products. One of the factors that had promoted investments in this sector was a 7 year tax holiday, which currently had a sunset clause of 31 March 2012. The industry was hoping that the tax holiday provisions will be extended to help realize the dream of making 'India as a refinery hub', but no such extension has been done. Similarly, the pipeline sector in India has always been sidelined, e.g. India has one of the lowest gas pipeline density in the world. One of the steps taken to promote investment in this sector was grant of investment linked tax incentive to the extent of 100% of capital investment to companies laying & operating cross country natural gas or petroleum pipelines. Similar benefit were also granted to cold chain, warehousing companies etc and the current budget has increased the incentive for these companies to 150% of capital investment. A similar increase has not been made for companies laying natural gas and petroleum pipeline network, which would have helped increased the investment outlay in this sector. From an Indirect tax perspective removal of customs duty on LNG, coal etc are steps in the right direction but the general increase in excise duties / service tax rates shall definitely increase the overall costs for the sector.

MUMBAI: Despite a rollback of customs duty on imported gas or LNG and an extension of viability gap funding for various oil

and gas installations, pipelines and LNG storage terminals, industry insiders see the Union Budget 2012 as lacklustre. Senior officials say they had expected complete deregulation of diesel, more freedom to revise petrol prices, abolition of excise duties and special duties prevailing on branded fuels. So, oil PSUs continue to be a worried lot, as they believe that the Budget did not do anything special for the sector that is reeling under one of its worst financial crisis, hit by a triple whammy of high crude prices, the government's steadfast refusal to deregulate fuel prices and the obvious under-recoveries that are threatening to bankrupt oil PSUs. The ongoing Iran crisis is the latest nail in the sector's coffin as its diplomatic tensions with the US and EU have pushed up international crude prices to a record $120 a barrel, which in turn pushed up India's average crude basket to $118. Not surprisingly, for the year ending March 31, 2012, the projected under-recoveries to be borne by oil PSUs is close to Rs 1,40,000 crores. Thus, total losses on this account to be borne by the state refiners this fiscal is expected at Rs 1.32 trillion compared with Rs 78,190 crore last year, according to the petroleum ministry. In the nine months ended December, it stood at Rs 97,313 crore. The overall impact gets grimmer when one takes a close look at the immediate scenario where OMC's incur a loss of Rs 13.55 per litre of diesel, Rs 439 per LPG cylinder, Rs 29.97 per litre of kerosene and Rs 6 per litre of petrol. All of this totals up to a daily loss of Rs 465 crore for the OMCs. A vicious cycle especially when India's crude oil import bill for the first nine months of the current fiscal 2011-12 shot up by 49% to Rs 469,993 crore, so OMCs say they may witness a 50% jump in losses in FY12-13 due to selling subsidised fuel.

Reacting to the reversal of customs duty on LNG, company sources said it's a very positive move given the industry's growing dependence on imported gas in wake of the declining natural gas production in the country, primarily due to steep fall in gas production at Reliance Industries D6 block in KrishnaGodavri basin, the country's largest gas reservoir. According to industry estimates, the two existing terminals at Dahej and Hazira and the Dabhol terminal, which could be commissioned by March-end, will receive around 250 LNG cargoes and the customs duty at the existing rate will be around Rs 2,500-3,000 crore. At present, the two operating LNG terminals in the country Petronet LNG's Dahej terminal and Shell's Hazira terminal - are importing about 13 million tonne (mt) annually. While Petronet's terminal is running at excess capacity of around 11 mt (terminal capacity is 10 mt), Shell is running at full capacity (of 3.6 mt) and is also in the process of increasing it to 5 mt. Also new terminals are coming up - Petronet's Kochi terminal (5 mt) and Dabhol LNG terminal (5 mt) - which will lead to further rise in imports. On the viability gap funding, company executives said they need more clarity on exactly who will be helping out with additional funds, whether it's the government or state-owned banks and what exactly will the entire methodology entail. They said it's a welcome move given that most lenders and investors are wary of pumping cash in the Indian oil and gas sector which is affecting key projects.