Oil sector plays the milch cow even as it goes on diet

Updated: Mar 1 2006, 05:30am hrs
Anti climax. That sums up finance minister P Chidambarams prescription for the oil sector. The sectors expectations, that soared on the back of the recently submittted Rangarajan committees do the right thing report, were dashed, with none of the reports recommendations implemented. But that did not stop the FM from extracting more oil money. The crude oil cess has been raised by Rs 700 per tonne to Rs 2500 per tonne, leaving ONGC and OIL to bear the additional burden of around Rs 2,000 crore already they are coughing up Rs 5,500 crore on an annual basis. Interestingly, the Rangarajan committee suggested a higher cess on the condition that the proceeds would fund the LPG and kerosene subsidy bill. So, while the cess has been hiked, the FM has not dwelt on its end use! And, the cess is a misnomer, for it basically ends up funding the fertiliser subsidy.

On the issue of LPG and kerosene subsidy, which knocks off Rs 10,000 crore from the bottomline of PSU oil companies, while the FM has decided against loosening his purse strings, he has made the states do the same by declaring LPG as part of the declared goods list. This will nibble into state revenues, around Rs 1,600 crore per annum, since the existing rates are as high as three times the 4% chargable under the declared goods list.

Energy industry in general and petroleum sector in specific was expecting changes which would rationalise fiscal regime and boost investments, in the interest of healthy financial status of companies to take on the energy security challenge. The Budget has, however, left most of these expectations unaddressed, said Nityanand Gupta, executive director and leader, oil and gas practice, PricewaterhouseCoopers.

On the taxation front, the finance minister has reduced the customs duty on naphtha for use in the petrochemical industry. This will benefit Reliance and other such petrochemical companies that use naphtha as feedstock. Since the duty has been reduced to nil, the public sector refiners will lose as the duty protection will be rendered negative. This is because crude attracts a 5% customs duty. The loss is estimated in the region of around Rs 600-700 crore per annum.

The Budget, however, smiles on the pipeline sector, for pipeline projects that will transport crude oil, petroleum products and natural gas are being notified as project imports. This essentially means that imports for laying the pipelines would attract lower customs duty than peak rates and to that extent will result in lower tranmission costs, and in turn, consumer prices of petro-products.

Commenting on the budget, petroleum minister Murli Deora said, I am satisfied with the reduction in customs duty on catalysts, of which the refining sector is a big user and also with the concessional customs duty proposed on pipelines carrying natural gas, crude and petroleum products. I also welcome classification of the domestic LPG as declared goods.