Oil explorers count on cess tweak
The finance ministry is likely to convert a cess on oil to an ad valorem rate of around 7-9 per cent, benefiting explorers such as ONGC, Oil India and Cairn, which are affected by a sharp fall in global crude prices.
Officials said the government was concerned over the financial health of the companies as the cess was impacting their revenues. This can have an impact on the Centre's energy security plan to push these companies to acquire stakes in overseas assets.
At present, state-owned ONGC and Oil India pay a cess of Rs 4,500 per tonne on crude from fields allotted on a nomination basis. Cairn pays the same cess for oil from the Rajasthan block.
An ad valorem tax is linked to prices, meaning collections are higher when prices rise and vice versa.
At present, cess is imposed on a per-tonne basis and is not linked to prices.
"There are indications that the finance minister can announce in the budget shifting of oil cess to ad valorem rate of around 7-9 per cent, which will boost the revenues of domestic exploration companies," officials said. Explorers have been pitching for a shift to ad valorem tax as global crude prices have slumped to below $30 per barrel. The cess translates into one-third of the realisation going away in just one levy.
"Prices are expected to remain at low levels in the near term because of high supplies, modest global demand and the decision of Opec to defend market share. Therefore, profits of upstream companies are expected to be under significant pressure in the near-to-medium term," rating agency Icra said in a research note.
K. Ravichandran, senior vice-president and co-head of corporate sector ratings at Icra, said, "It may be imperative to make cess an ad valorem levy, which moves in line with the oil prices for the industry to make meaningful cash generation in this high-risk industry."
"In 2005-06, when crude prices had increased from an average of $40 per barrel to $60 per barrel, cess was increased from Rs 1,800 to Rs 2,500 per tonne. Again, when prices increased to over $100 per barrel, the cess was increased to Rs 4,500 per tonne ($10 per barrel) with effect from March 17, 2012," Petrofed, an association of oil companies, said.
ONGC Videsh Limited (OVL) is experiencing income and cash flow challenges as a result of low oil and gas prices and this can constrain financing options.
"We have to factor in the new price realities. Our ability to acquire depends on the health of our parent, ONGC. If it deteriorates it will definitely impact us. If we are struggling to manage our own balance sheet then this opportunity cannot be capitalised," Narendraverma, managing director of OVL, said.
The cash flow challenges can impede the state-owned company's ability to take up an offer made by Sudan for three more oil and gas blocks for exploration and production and an invitation to the Indian companies to set up a coastal refinery to boost fuel supplies to Africa.
OVL has a 25 per cent stake in Greater Nile Oil Project in Sudan, which produces about 50,000 barrels of oil per day.
Sudan has offered Blocks 8, 15 and 24 for exploration of oil and has asked OVL to consider buying a stake in producing Block 17, which produces 7,000 barrels of oil per day.
A sharp 13 per cent decline in crude prices and an increase in discount to the Rajasthan crude to $9.2 per barrel have hit Cairn India's December-quarter numbers.
Its consolidated net profit plunged 99.3 per cent to Rs 8.69 crore during the quarter from Rs 1,349.64 crore a year ago.
Cairn got $34.5 per barrel price for the oil it produced from its flagship Rajasthan fields compared with about $68 per barrel in the year-ago period.