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Budget could turn out to be a major positive for upstream oil firms

Upstream subsidy burden might be reduced with crude prices expected to remain low

Sudheer Pal Singh  |  New Delhi 

2015-16, to be presented in Parliament on Saturday, is likely to be a major positive for upstream oil and gas companies, including Oil and Natural Gas Corporation (ONGC), but might not be a game-changer for downstream firms such as Indian Oil Corporation (IOC).

Analysts expect budgetary measures to be focused on providing clarity on the formula for sharing subsidy burden on downstream companies on account of subsidised sales of cooking gas and kerosene. Upstream firms had to bear up to 60 per cent of the Rs 1,39,000 crore of losses of oil marketing companies (OMCs) in the previous financial year..

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The petroleum ministry has proposed a new subsidy-sharing proposal by which upstream companies would not make any contributions towards subsidy burden if crude prices are at or below $60 a barrel. They would bear 85 per cent subsidy burden when the crude oil price exceeds $60 a barrel and is less than or equal to $100 a barrel. In case crude prices exceed $100 a barrel, the upstream firms would bear 90 per cent burden.

“A concrete subsidy-sharing formula would provide visibility over earnings of upstream oil companies and hence, it would be positive for companies like ONGC, Oil India and GAIL (India),” said Rahul Dholam, senior research analyst at Angel Broking.

He added the upstream subsidy burden might be reduced with crude prices expected to remain low and the government looking to divest stake in upstream companies.

ONGC reported a 14 per cent decline in earnings at Rs 20,302 crore in the quarter ended December 2014, while OIL income dropped 20 per cent to Rs 2,400 crore. Income of gas utility GAIL dipped seven per cent in the quarter.

Another major positive expected in the for upstream firms is the likely announcement of introduction of customs duty on crude oil imports. “The government is also likely to reintroduce 2.5-5 per cent customs duty on import of crude oil, which will be positive for Cairn India and negative for private refiners and OMCs,” said Dholam.

Business Standard had reported on February 5 that customs duty on crude oil, scrapped in 2011 amid high global oil prices, could be restored in the coming as crude oil prices have been weakening. The finance ministry is considering re-imposing the duty at a rate of three per cent in a move that might fetch the exchequer around Rs 14,000 crore in the next financial year and help the government meet its fiscal deficit target at 3.6 per cent of the GDP in 2015-16.

According to consultancy firm BMR Advisors, the Budget is expected to have measures related to starting the 10th round of New Exploration Licensing Policy to ensure oil and gas acreages are available round the year and not in a cyclical manner; clarity on whether the licensing framework should shift from cost-sharing to revenue sharing; deregulation of liquid petroleum gas and kerosene; reinstating tax holiday under Section 80-IB for mineral oil including natural gas and clarify that oil wells should be considered as "plant & machinery" and not "building" for claiming income tax depreciation.

First Published: Thu, February 26 2015. 00:28 IST