Oil producers knock govt’s door, seek relaxation in royalty, cess

Domestic oil and gas operators have approached the government seeking a reduction and deferment of royalty, cess and profit petroleum paid by companies to the government, with the Covid-19 pandemic hitting demand and pushing international crude prices to new lows.

In addition, companies batted for a higher gas price compared to the existing $2.39 a million British thermal unit (mbtu), effective from April to September this year.

In a letter to the finance ministry, the Association of Oil and Gas Operators (AOGO) said oil and gas operations are now unviable owing to the higher share of government taxes.

The industry body’s move comes after a decline in oil prices by around 60 per cent since January 1, leading to a 97 per cent decline in operator revenue.

The operator share has shrunk to less than 3 per cent of the earlier revenue during this period. “The government, however, continues to take away a predominant share (98 per cent) of revenue through cess, royalty & profit petroleum even in a low crude price regime. This is forcing oil & gas operations to an unviable status,” the letter said.

The association demanded that benefits accruing to contractors from reduction in rates should be exempted from corporate income tax. The operator group also indicated that gas prices were much lower than per barrel operating expenditure, resulting in negative return.

“We have asked the government to reduce its various shares. In addition to this, other policy changes and timeline reconsiderations, too, along with more marketing and pricing freedom,” said Ashu Sagar, secretary general, AOGO. On Thursday, the price of Brent crude was seen at $27.12 a barrel.

The dip in international prices is positive for India as the country’s import dependency in 2019-20 was around 85.1 per cent, up from 83.8 in 2018-19.

Owing to lower prices, the import bill, too, dropped from $111.9 billion in 2018-19 to around $95 billion till February in 2019-20.

The coronavirus pandemic has curtailed all activities and reduced the global energy demand, resulting in excess supply and low prices. However, this lower price regime is denting the profits of domestic producers. Based on industry estimates, domestic producers save the country more than ~1.7 trillion per annum with their production and consequent reduced imports.

AOGO, in its letter, added that production-sharing contracts that are due for renewal between March and September 2020 should be extended till March 2021 on same terms, and extension can be made effective from April 2021 under the P SC extension policy.

Other demands include allowing exploration cost recovery from existing revenues and removal of ceiling on gas price for difficult fields. The current ceiling price on domestic natural gas is $5.61 mbtu on gross calorific value basis. The AOGO letter also asked the government to provide tax benefit for exploration and development activities by levying zero goods and services tax.