Finance minister Pranab Mukherjee?s decision to withdraw the benefit of seven-year tax-free profits on oil blocks to be allocated from 2011-12 is likely to depress the government?s share of profit petroleum. The petroleum ministry, keen to retain investor interest in the exploration sector, has to put up with the loss.
The government now gets 85% of profit petroleum from the Ravva field in the Krishna Godavari basin where Cairn India, Videocon and ONGC have production rights. From the prolific Reliance Industries-operated D6 block in the same basin, the government?s share of profit will go up to 90% when the investment multiple (how many times the earnings are compared to the investment) touches 3.5. Now, the government?s share is 10%.
The operator of an oil field recovers its costs from the sale of crude produced and then shares the remaining profit with the government at a ratio discovered through competitive bidding. This shared profit is called profit petroleum. The government awards blocks to investors that offer the most attractive terms on cost recovery and profit sharing.
A government official said that discontinuing with the tax holiday would force bidders to reduce the government?s share of profit petroleum. This is relevant for all blocks to be licensed in the future including the 34 blocks that will go under the hammer shortly.
The move was announced by Mukherjee in Union Budget 2011-12.
?The move (to deny tax holiday) will reduce the project economics. It is very much possible that investors would become conservative in their bidding,? said Kalpana Jain, senior director at Deloitte Touche Tohmatsu India.
The gestation period for oil exploration is long and the expenditure is very high in initial years. Today, raising capital is not easy and denying the tax holiday would make investors cash-shy, Jain explained. Besides, India does not have the sophisticated technology and equipment for deep sea drilling, for which it has to rely on foreign investors. Seven of the 34 blocks on offer in the forthcoming auction of blocks are in deep sea, while two are in shallow water.
The petroleum ministry has set March 16 as the deadline for submitting expressions of interest and award of blocks in the ninth auction under New Exploration Licensing Policy (Nelp) will happen only at the beginning of next fiscal, making them ineligible for the tax break.
