The big winner in the corporate sweepstakes in this Budget is the oil & gas sector. Though the stock markets reacted adversely going down by 5.83 % at the BSE and the oil sector indices also down by 5.81 %, there are more positives in that story.

Finance minister Pranab Mukherjee not only announced his intention to re-look into the fuel subsidy regime to handle the impact of yo-yo swing in oil prices, the larger tax concessions to the sector were also substantial. Of course the markets would have reacted more positively if Mukherjee had moved more forcefully on the reforms.

He already had the specific recommendations made by several committees regarding deregulating of oil prices and transparency in the subsidies, but they were overlooked. He has also introduced a tax clause that has raised the excise duties on branded petrol and diesel. While the net effect on diesel is flat, petrol prices could rise by 13 paise a litre.

Hoping to make natural gas a far more important constituent of the national energy composition instead of the current 8% that it now accounts for, the finance minister announced setting up of a national gas grid. He made a specific mention of the discovery of gas in the eastern offshore KG basin by companies like Reliance Industries Ltd and ONGC.

The FM, therefore, offered an income tax exemption for all pipeline companies laying operating pipelines for natural gas, crude oil and petroleum for distribution on common carrier principle, such as Gail, Reliance Gas Transportation India Ltd and L&T.

The finance minister claimed the production of natural gas was set to double and given its importance as an important source of energy, the government was developing the blue print for the national gas grid. Currently lack of transportation inhibits gas supply across the country. Most of gas is discovered in the western and the northern regions and insufficient infrastructure for transportation leads to impediments in supplying it to gas starved areas like the north-east. This would mean companies in power, fertilizer and city gas would be able to expand their network across more regions, than being concentrated in states like Gujarat and Andhra Pradesh.

However, analysts maintained that the finance minister’s announcement of tax breaks on profits made from production and sale of natural gas, only to blocks to be awarded in the forthcoming auction, has deprived firms like RIL and ONGC of the gains in upstream section of oil and natural gas exploration. “The tax holiday under section 80-IB(9) of the Income Tax Act would be available for companies on profits they earn from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the New Exploration Licensing Policy (Nelp) 8th round of bidding,” Mukherjee said while presenting the Budget.

What the minister did was to rectify the restriction imposed by the revenue department last year. It had excluded gas explorations from the seven-year tax holiday given to oil exploration companies, a move, which the oil exploration companies are currently contesting in the Ahemadabad High Court.

The restoration of the tax breaks has been announced to attract foreign investment in the sector according to analysts. After the revenue department made gas finds ineligible from the tax break, several foreign companies which had entered into joint ventures with local companies went slow on their investments.

“There are still some controversies on the investments made in the past. Tax breaks for the natural gas exploration and production made this year are only for future investments in the Nelp 8 blocks. There was no need to limit it to Nelp 8 only” said Ravi Mahajan of E&Y.

In another reversal of previous regime’s announcement, Mukherjee has extended tax holidays on profits of oil refinery in private sector, coming up after April 1 2009, by extending the seven year tax holiday until March 31, 2012.

Here too Mukherjee introducing the provisions said the “sun-set (clause) for tax holiday for private refiners sector at March 31, 2009 was extremely short and so it is being extended by a further three years to March 31, 2012. The new terminal date will be the same for both the public and the private sector companies”.

This would basically benefit companies like Essar Oil, Indian Oil Corporation and HPCL’s Bhatinda refinery in which steel tycoon L N Mittal is also a partner.

However, despite the favourable announcements the share prices of oil marketing firms dipped on the Bombay Stock Exchange.

This explained the analysts is because the market took the announcement regarding the formation of a committee to look into the pricing with scepticism since in the past also two such committee’s — the Rangarajan Committee and the Chaturvedi Committee — suggestion for decontrolling the prices were not acted upon.

Shares of HPCL closed down 4.17% on the BSE at Rs 317.15, RIL shares closed down 6.53% at Rs 1893.60, those of ONGC closed 5.67% down at 1,070.35.

In short, while the upstream oil and gas exploration companies would gain in terms of tax breaks for future investments, the oil marketing firms may take solace that the FM has announced a constitution of an expert committee to look into the pricing of petroleum products, which may look at deregulating oil prices.