Oil ex­plor­ers count on cess tweak

Resource Digest - - CONTENT -

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.

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