Cairn seeks cut in cess on crude as oil prices halve

Cairn India has asked government to cut the cess levied on crude oil produced from its Rajasthan fields as the levy was taking away nearly a fifth of revenue at a time when oil prices have halved.
A cess of Rs 4,500 per ton (about USD 9 per barrel) is levied on crude oil produced by state-owned ONGC and Oil India from fields given to them on nomination basis.
It is also levied on Cairn's prolific Rajasthan field but is not levied on areas awarded under New Exploration Licensing Policy (NELP) like KG-D6 of Reliance Industries.
Sources said Cairn and its partner Oil and Natural Gas Corp (ONGC) have written to the government seeking relief on levy of cess citing the Production Sharing Contract (PSC) for Rajasthan field which is silent on such a levy and does no specify any rate.

Cairn had also initiated an arbitration against the levy but had to drop it as part of the conditions laid down by the government for approving takeover of the company by Vedanta Group.
The company has pointed out that a cess is applicable only on pre-NELP blocks. And even there the rate is fixed at Rs 900 per ton on 26 blocks awarded prior to 1999.

Only in case of Rajasthan is the cess levied at Rs 4,500 per ton.
Sources said the cess has become a burden for producers after international oil prices halved to around USD 50 per barrel.

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 tone in July 1974 and subsequently revised from time to time.
During 2005-06, when the crude oil prices had increased from an average of USD 40 per barrel to USD 60 per barrel, OID Cess was increased from Rs 1,800 to Rs 2,500 per ton from March 1, 2006.
Again, when the crude oil prices increased to over USD 100 per barrel, the rate of cess was increased by Government to Rs 4,500 per ton with effect from March 17, 2012.

While the cess had in the past been linked to prevailing crude oil prices when it has hiked, the same principle should be applied when rates have fallen, sources said.
Sources said Cairn has told the government that its Rajasthan block has completed 300 million barrels production in six years and has contributed over Rs 60,000 crore to the exchequer.