Oil firms to gain from higher subsidies

OIL AND GAS: An extra Rs 15,000-cr oil subsidy will help cash-strapped oil marketing companies

While enhancing the provision for petroleum subsidy for the current year, Finance Minister Pranab Mukherjee has provided some relief for government-owned oil and gas companies. The last supplementary to the current year’s Budget is now expected to provide Rs 15,000-crore more towards petroleum subsidy.

At a revised estimate of Rs 68,481 crore for 2011-12, the subsidy would still be less than the amount the government would need to dole out during the year if the upstream share is kept at 33 per cent and oil marketing companies (OMCs) are reimbursed in full. This has left OMCs guessing on whether or not they would be reimbursed in full for the revenue lost in selling controlled products at below market prices.

Besides, the government has continued with the trend of less-than-realistic provisioning towards petroleum subsidy for 2012-13 by keeping it at Rs 43,580 crore. The Budget is assuming softening of international crude prices. Last Budget, it had assumed Rs 23,640 crore as petroleum subsidy, forcing it to hike the amount by more than three times in the revised estimate for 2011-12. So far, through the two supplementaries to the Budget, the amount has already been enhanced to Rs 53,640 crore. “The direct subsidy in cash, compared to bonds, is expected to improve the cash and working capital position of oil and gas companies, particularly oil marketing companies,” said Kalpana Jain, senior director, Deloitte Touche Tohmatsu.

The Budget, however, has burdened the oil and gas producing companies with an increase in cess — to Rs 4,500 a tonne, from Rs 2,500 tonne now. Stating the cess was last revised in 2006-07, the finance minister said the increase has been done as a measure of indexation. The positive for these companies has come in the form of removal of customs duty for some equipment used in exploration and production.

According to Saloni Roy, tax partner, Ernst & Young, the negative for the oil and gas sector also comes from the minister not accepting the long standing demand of the sector to include natural gas in the list of Goods of Special Importance for the purposes of sales tax. Import of LNG has, however, been exempted from customs duty, bringing it on par with crude oil.

By making oil and gas, including LNG, storage facilities and pipelines eligible for viability gap funding, the finance minister has ensured projects are actually implemented, even though they may initially not appear to be viable for the private sector.