Oil and gas companies seek pandemic relief in the upcoming Budget

The Centre had considered tax sops for exploration and production operators in May 2020

The Budget may provide an opportunity to the Centre to apply some balm to the bruised domestic oil and gas exploration sector. With crude oil prices falling to record lows, even tumbling into negative territory for a day, the year 2020-2021 has severely hurt the balance sheets of exploration companies.

While the price of crude oil in India did not go into negative territory, it remained low enough to strain exploration and production (E&P) companies. 

Crude oil in India is traded close to the Brent, a price that is the benchmark for African, European, and Middle Eastern crude oil.

“With Brent trading below $45 a barrel for most of the financial year, domestic oil companies have faced severe headwinds. 

For Indian exploration companies, the sustainable price is $45 a barrel of Brent, but a viable price is closer to $65 a barrel where they make a margin. Any price below these levels makes it difficult for oil companies to operate,” said an E&P company executive.

To provide relief to aggrieved companies, the Centre had mulled tax sops for E&P operators in May 2020. These reliefs did not materialise this financial year and companies are placing their bets on the Budget for a further respite.

According to P Elango, managing director (MD) of Hindustan Oil Exploration Company (HOEC), the oil and gas industry is burdened with service tax demand on cash calls, royalty payments and profit petroleum payments. 

“The industry, in these challenging times, has no tax credit option for 18 per cent service tax being paid virtually in every exploration, development and production services,” Elango said.

The issue of bringing oil and gas under the goods and services tax (GST) regime, and allowing an input tax credit to the sector is a subject for the GST Council to deliberate upon. 

Currently, crude oil, petrol, diesel, aviation turbine fuel and natural gas are out of the GST regime. But the E&P players are hoping that other levies can be tinkered with in this Budget itself.

According to Elango, all eyes are now on a policy bridge that allows migration from production-sharing contract regime (with associated cost recovery issues) to revenue-sharing contract regime (with its ease of business).

Dharam Singh Rajput, an official of the Association of Discovered Small Field Operators, said, “The government has provided a special dispensation with regard to bank guarantee on account of Covid-19 and its effects on the oil and gas sector by reducing the guarantee amount by 75 per cent.”