Oil & Gas: Duty relief a plus but no big-ticket moves a let-down

The government's plan to bring in PPP to complete the gas grid across the country was viewed positively

The maiden Budget of the National Democratic Alliance government was a disappointing one for the oil and gas sector. Although the finance minister said the government would accelerate production and exploitation of coal-bed methane (CBM) reserves, and use modern technology to explore and revive old or closed wells to maximise production from such fields, it did not raise the morale of the players in the sector.

"There were no major announcements but we look forward the policy on CBM and petroleum natural gas, as has been hinted by the government," said L K Gupta, MD and CEO of Essar Oil.

The lack of sops reflected in the performance of the oil and gas index, which closed at 0.50 per cent on the BSE. The Sensex closed nearly flat at 0.28 per cent.

BELOW EXPECTATIONS?

Expected

• Diesel deregulation
• Clarity on E&P taxes
• Re-introduction of income tax holiday for E&P
• Production sharing contract reforms
• Change in upstream cess and royalty
• Bringing gas under GST

Received

• PPP complete the gas grid across the country, with additional 15,000 km

The government's plan to bring in public-private-partnership (PPP) to complete the gas grid across the country, with an additional 15,000 km, however, was viewed positively. Currently, India has about 15,000 km of gas pipeline system.

"It is proposed to develop these pipelines using appropriate PPP models. This will help increase the usage of gas, domestic as well as imported, which in the long-term will be beneficial in reducing dependence on any one energy sources," said Jaitley.

Nabin Ballodia, partner - tax (oil and gas) at KPMG, said: "It has laid the focus on natural gas and related infrastructure. However, no direction has been provided for indigenous exploration activities. Reduced reliance on imports and vulnerability to external conditions is only possible through domestic exploration. The overall impact is negative on the already-stressed oil and gas sector."

The petrochemical industry, however, reacted positively to the sops announced for it. Among others, the government has reduced basic customs duty on reformate from 10 per cent to 2.5 per cent and on ethane, propane, ethylene, propylene, butadiene and ortho-xylene from five per cent to 2.5 per cent. Analysts said a cut in customs duty on ethylene and propylene, however, will have no impact on Reliance Industries (RIL), as external sale of the products are negligible. RIL closed at Rs 998.2, down 0.18 per cent on the BSE. Also, domestic prices will be tweaked to pass on lower customs duty, keeping the overall petchem chain margins intact.