Oil and gas companies are in a bind. Budget 2009-10 has been both positive and negative for them. In fact, the negatives far outweigh the positives. Upstream companies, in particular, have been most disappointed. That?s because of two major hiccups: One is the silence of the budget concerning the tax holiday on gas production for blocks under past rounds of the National Exploration and Licensing Policy (NELP).
Basically, the current budget has provided for a seven-year tax holiday on gas production for blocks under round eight of NELP. It is silent on whether pre-NELP and NELP round I to VII blocks also qualify for this incentive. This is obviously disturbing upstream players because production sharing contracts that were drafted for earlier rounds took into account this crucial tax holiday on gas production. ?It was no doubt a big relief for us,? says an industry insider. ?Now I am not sure whether it exists or not.?
By some accounts, the budget has summarily withdrawn this benefit that existed for past projects. Says R S Sharma, chairman & managing director, Oil & Natural Gas Corporation (ONGC) Ltd: ?It is clear that the tax holiday that existed for gas production on past projects has been withdrawn. There was ambiguity concerning it. It has now been cleared in this budget.? Says Vijay Iyer, tax partner, oil & gas group, Ernst & Young, ?It is definitely a big dampener.? That?s because much of the investment into past projects was made keeping in mind this tax holiday. Its withdrawal leaves many in the lurch.
But the second issue that upstream companies have to contend with is even more disturbing. Here the budget has clarified that the undertaking concept under Section 80-IB (9) of the Income Tax Act will apply to a block and not to a well-head as was the case in the past. Upstream players such as Gujarat State Petroleum Corporation (GSPC) and Niko Resources have locked horns in the past with income tax authorities on this matter. ONGC, which had approached the Income Tax Appellate Tribunal, seeking a refund of over Rs 3,000 crore on account of the tax it had been paying under the given Section, will not be able to get it now. ?Our appeal will not hold any merit,? says Sharma of ONGC quite dejectedly.
But this is just part of what is bogging the industry down. Mid-stream or transmission players such as Gas Authority of India Limited (GAIL) have their own cup of woes. The key one is the tax rebate that was available to them under Section 80IA of the Income Tax Act. That has been withdrawn. Basically, the Finance Bill 2008 accorded infrastructure status to certain projects including gas pipeline networks. ?With it came a tax benefit too,? says R KGoel, director, finance, GAIL. ?Basically for the first ten years of a project, there was 100% rebate given on profits. This was under Section 80IA of the Income Tax Act. This has been withdrawn under the current budget and in its place a section 35AD has been introduced. This is an investment allowance, where 100% capital cost has been set off against the profit of the asset. This is obviously not the best thing for us because the benefit that we enjoyed under 80IA was quite a bit.?
Of course, upstream and mid-stream companies intend making formal representations to the Petroleum Ministry highlighting their issues in specific. But the question is why has the finance minister proposed these measures in the first place? ?I can?t seem to understand what objective has been served with all this,? says the chief executive of an oil & gas PSU. ?I find the measures retrograde.? Tax consultants are of the view that the government could be looking at a revenue objective at this point ? an argument that Goel of GAIL buys into as well. ?The government could be of the view that the industry can survive another year, that is, till the next budget, without fiscal benefits. The situation is tough though.?
At a time when gas production should have been incentivised, the government has opted to do quite the contrary, say some. Experts are of the view that this is the age of gas, not oil. ?Worldwide oil production is stagnating. Gas demand is going up. This in turn is fuelling the production of gas and governments worldwide are incentivising it,? says M N Prasad, former chief executive officer of Prize Petroleum, the upstream oil company of Hindustan Petroleum Corporation Ltd (HPCL), who is now the president and CEO of Selan Exploration Technology Ltd, a Bombay Stock Exchange-listed oil and gas explorer.
India?s gas production, according to the Ministry of Petroleum & Natural Gas, is about 87 million standard cubic metres per day (mmscmd). Consumption, after flaring, extraction of LPG etc, is about 74 mmscmd. By some accounts, there is clearly potential to increase production of gas. This, in turn, could boost consumption and help bring down the dependence on crude imports. At the moment, India?s imports over 70% of its crude oil requirements. That is because production of oil in India is about 34-35 million tonne per annum against a domestic requirement of 156-157 million tonne per annum. Ironically, the fiscal benefits available to bidders under the forthcoming, that is, the eighth round of NELP is intended to boost both oil and gas exploration and production. The question is: Is it enough?