1. Energy security: Why India needs to step on the gas

Energy security: Why India needs to step on the gas

With crude oil prices rising again, the immediate task before the govt is to rationalise the skewed tax structure for domestic oil producers, which will cut down dependence on imports.

Published: January 3, 2018 4:02 AM
energy security, oil, electricity, gas, petroleum, indian economy, economy, market, stocks The Hydrocarbon Exploration and Licensing Policy is a step in the right direction. The initiative has opened 2.8 million square kilometres for new explorations.

By Abhishek A Rastogi

Consider this: From a low of $48 in August 2015 to $62 this week, the 30% rise in crude prices has sent alarm bells ringing for the country’s economy. Where India imported just 37% of the oil it consumed, it is now importing 4.4 million barrels of crude oil every day to meet 82% of the country’s demand. Oil alone accounts for 31% of India’s imports. The unprecedented dependence on oil imports and the resultant economic instability are reflective of India’s half-hearted approach to energy security. The need of the hour is to create an ecosystem for encouraging domestic production and cutting down dependence on imports with a sustained approach. To encourage domestic output, the immediate task before the government is to rationalise the heavily skewed tax structure for domestic oil producers and create a level-playing field that will up investments and increase explorations. Today, not only are different norms applicable to different companies, but also the continuation of erstwhile indirect taxes along with the steep rates of levies like cess are choking the domestic companies. Upstream companies have been left stranded with high taxes that are leading to higher blockage of working capital and the resultant opportunity losses. The recent roll-out of the goods and services tax (GST) has further exacerbated the situation. With crude oil falling outside the purview of GST, upstream companies are unable to claim tax benefits even as they bear GST on the procurement of goods and services for exploration. This double impact has dealt a severe blow to the already reeling industry. Few players have opted to move high courts for writ against issues such as prohibition on purchase of products against Form C with effect from July 1, 2017. The other writs which may help the sector include issues such as IGST on ocean freight, reverse charge for procurement from unregistered dealers and taxation of goods in the customs bonded warehouse before the goods cross the customs frontier.

Paving the path
The Integrated Energy Policy Report by the Planning Commission’s expert committee has pointed out that India must ensure reliable availability of energy—particularly petroleum products—at a competitive price, in case India has to grow at a higher pace. This requires consistency in policies and pricing. The energy policies that we have adopted to serve the socio-economic priority of development have encouraged and sustained inefficiencies in the use and production of energy. As a corollary, today we pay one of the highest prices for energy in purchasing power parity terms and this has eroded the competitiveness of many sectors of the economy. A competitive market without any entry barriers is the most efficient way to realise optimal fuel and technology choices for extraction of crude oil. The tax structure and regulations governing domestic producers should be consistent and concurrent with international guidelines. Besides, institutional arrangements should provide a level-playing field for all players.

The government of India, through the ministry of petroleum and natural gas, should adhere to the import parity principle in fixing the effective price of domestic crude. Not adhering to this pricing methodology leads to multiple distortions, when coupled with the fact that there are differential duties on crude oil and petroleum products, differential excise duties and central levies on products, as well as differential state taxes. For instance, the current practice of steep royalties at the exploration stage gives a big blow to private companies, severely impacting feasibility and future investments. However, the government has taken proactive steps to address ambiguous issues under the GST regime such as applicability of GST on Superior Kerosene Oil (SKO) retained for manufacture of Linear Alkyl Benzene (LAB) and taxation of bunker fuel.

The policy push
Back in 2014, Prime Minister Narendra Modi had set the target to bring down India’s import dependence on oil and gas by at least 10% by 2022. If this goal is to be achieved, then the government must proactively boost domestic production and cut reliance on imports. Import dependence will keep rising, unless significant new discoveries are made. Only one-third of the potential oil bearing areas have been explored so far and geologists predict vast amount of undiscovered oil in India.

The government’s Hydrocarbon Exploration and Licensing Policy (HELP) is a step in the right direction, encouraging companies to explore through open acreage licensing and allowing explorers to get market-driven prices. The initiative has opened 2.8 million square kilometres for new explorations and the revenue-sharing model promises pricing freedom for the oil and gas produced. International majors have shown interest in the latest round of bidding for exploration blocks under the new policy and the government should do its bit by conducting the bidding process in a fair, swift and transparent manner to retain investor confidence. Besides, the tax certainty should be provided for these revenue-sharing models, which remain an area of dispute.

The government should rationalise taxes to create parity and encourage fresh investments that will lead to more discoveries and more exploration. A case in point is the steep 20% cess on domestically produced crude oil, which puts a huge burden on domestic production. While linking the cess to an ad valorem rate in last year’s Budget is a step forward, cutting the cess to 10% will go a long way in boosting domestic production. Besides, bringing petroleum products within the gamut of GST is a necessity and will remove tax cascading to a large extent. The upcoming Union budget will be an opportunity for the finance ministry to iron out the flaws plaguing the domestic oil exploration industry and set an aggressive tone for boosting oil yields that will benefit the nation by cutting imports significantly.

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