Budget proposes ad valorem based cess on crude oil

In relief to ONGC and Cairn India, Finance Minister Arun Jaitley today changed the cess on the crude oil they produce domestically to ad valorem while at the same time offered calibrated marketing freedom to firms such as RIL for yet to be produced gas discoveries.
Meeting half-way the demand of domestic oil producers to link cess on crude oil to prevailing price, Jaitley in his Budget for 2016-17 change cess on crude oil to 20 per cent of the prevailing oil price as compared to Rs 4,500 per tonnes currently.
At USD 35 per barrel oil price, this essentially means Oil and Natural Gas Corp (ONGC) will have to pay Rs 3,500 per ton cess on crude oil it produces from fields given to it on nomination basis. The same will be the rate for Cairn India's Rajasthan oil fields.

These firms had wanted cess to be levied at 8-10 per cent of the oil prices, which slumped to an 11-year low.
The Oil Industry (Development) Act, 1974, provides for collection of cess as a duty of excise on indigenous crude oil. Cess incurred by producers is not recoverable from refineries and thus, forms part of cost of production of crude oil.
The cess was levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time. In 2005-06, when the crude oil prices had increased from an average of USD 40 per barrel to USD 60, the OID cess was raised from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006.

Again, when the crude prices climbed to over USD 100, the rate of cess went up to Rs 4,500 (USD 12 per barrel) with effect from March 17, 2012.

"The Oil Industry (Development) Act 1974 is being amended so as to reduce the rate of Oil Industries Development Cess on domestically produced crude oil, from Rs 4,500 per tonne to 20 per cent ad valorem OIDB Cess. The amendment in the Act will be effective from the date of assent to the Finance Bill, 2016," the Finance Bill said.
Jaitley in his budget speech in Lok Sabha said two stage gas pricing freedom would be given to firms like RIL and ONGC who have several gas discoveries that are unviable at current price of USD 3.82 per million British thermal unit.

"India is blessed with rich natural resources including oil and gas. However, their discovery and exploitation has been below our potential," he said.
With near stagnation in domestic production and consequent rapid increase in imports, the "Government is considering to incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of higher cost and higher risks," he said.
Jaitley also proposed to discontinue tax holiday on
commercial production of mineral oil for blocks starting production on or after April 1, 2017.
The cess on crude oil will negatively impact oil companies in the event of sharp rise in oil prices beyond USD 45 per barrel.

Subsidy provided for the oil sector is Rs 26,947 crore for 2016-17.
ICRA said because of significant fall in gross under recoveries for the sector, there may not be any need to carry forward the last quarter subsidy if the oil prices stay below USD 40 per barrel.
"The budget also has favourable proposals for the upstream sector in terms of marketing freedom on gas for new discoveries in deepwater and complex fields and pricing benchmarked against alternate fuels. However, its non applicability for existing discoveries could be a dampener for the industry," said K Ravichandran, Sr VP, Co-head, Corporate Sector Ratings ICRA Ltd.

Cairn India CEO Mayank Ashar said the proposed relief in crude oil cess "is too little."
"Current margins for Cairn after depreciation are negative in our world class Rajasthan field. We would seek continued dialogue with the government to ensure that the necessary investment in the sector is not further curtailed which may hamper India's quest for energy security," he said.
ONGC Chairman and Managing Director Dinesh K Sarraf said the relief in cess would add Rs 2,000 crore to its profit before tax.
"We were expecting cess to be around 8-10 per cent," he said.
Essar Oil CEO & MD L K Gupta said the new initiatives announced for the poor such as gas cooking gas connection to BPL families will ensure more people have access to cleaner fuels.

Raju Kumar, Tax Partner - Oil and gas, EY, said vision for growth of Indian oil and gas industry is being created by incentivising gas production from deepwater, ultra deepwater and high pressure-high temperature areas and offering calibrated marketing freedom for new discoveries which are yet to commence commercial production.
"An appropriate implementation of the proposal to incentivise deepwater, ultra deepwater areas is expected to help in improving self-sufficiency through enhanced domestic production besides bringing in foreign investment and state of the art technologies which are required for exploitation of these areas," he said.