Budget to push up cost of offshore oil exploration

OMCs also worried at seeming setback to any early move to cut underrecoveries on retailed fuel.

The Budget clarification on extension of service tax to include all activities in the entire continental shelf and exclusive economic zone will increase the cost of offshore exploration for Oil and Natural Gas Corporation (ONGC), the country’s biggest explorer.

Reliance Industries Ltd, another major explorer, will also bear the impact of this tax, though it declined to quantify.

“We have to pay an additional service tax of Rs 1,000 crore annually,” said ONGC’s director (finance), D K Saraf. The Budget clarified that any service which the upstream oil companies procure while undertaking exploration activity in offshore areas will be subject to service tax. The companies were of the view that taxes would apply only after a vessel, structure or installation comes into operation.

OMCs restive at retail losses
The increase in prices of petrol and diesel by Rs 2.71 and Rs 2.55, respectively, on account of an increase in customs duty on crude oil and increase of Re 1 in excise duty for both these products will make it difficult for the government to take another increase to cut the underrecoveries of oil marketing companies (OMCs). In the current fortnight, the OMCs are estimated to lose Rs 4.72 on every litre of petrol and Rs 1.94 on every litre of diesel.

The petroleum sector had expected some clarity on the government’s position on the Kirit Parikh committee’s report (which asked for freeing of petrol and diesel prices from government control), said R S Sharma, chairman and managing director of ONGC.

“We were expecting some price revision because of underrecoveries on petrol and diesel,” said S V Narasimhan, director (finance), Indian Oil Corporation. He noted the Budget just made a provision of Rs 12,000 crore for underrecoveries in the current financial year and none at all for those in 2010-11. In the current year, the OMCs — IOC, Bharat Petroleum and Hindustan Petroleum — are estimated to have a total underrecovery of Rs 31,000 crore on sale of kerosene and domestic LPG at government-capped prices. “It is a concern to us, since for every quarter we will have to ask the government to compensate the underrecoveries,” he said.