Budget 2016: Given the global economic headwinds, the new oil order and the Prime Minister’s vision of reduced imports, I was expecting fundamental step change in the budget towards its approach to the oil & gas industry. One of the most critical pieces of reform for the Oil & Gas industry was to convert the existing specific cess levy to an ad valorem.
The Budget announcement of a 20% ad valorem cess is directionally a right step. However, a lower rate of cess—5% to 8% of realised price of crude oil—would have likely helped stimulate the oil & gas sector; particularly fields which are already producing crude oil. Lower cess rate was imperative as, given the geological landscape, the fiscal burden on the Indian oil & gas sector is very high vis-a-vis other countries.
Today, the share of natural gas in India’s total energy mix is way below the world average. Given the climate change imperative and India’s Intended Nationally Determined Contribution, it is vital that in addition to the renewable energy, we create an enabling framework which increases the share of natural gas in India’s overall energy mix.
To this end, the Budget announcement of a proposal under consideration for new discoveries and areas which are yet to commence production, for providing a calibrated marketing freedom and for predetermined ceiling price on the principle of landed price of alternative fuels is indeed a positive step. This would likely improve the economics of future gas discoveries and as a result support higher penetration of natural gas.
The Budget also has made provision which could likely violate existing signed contracts. For instance, the Budget announcement with respect to Section 80-IB is of concern. It envisages no deduction for mineral oil or natural gas which commences production on or after April 1, 2017. This provision is contrary to what has been provided in the production sharing contract and stated government policy.
The Indian oil & gas sector is at crossroads. It is going through a challenging phase and is in need of significant investments. It is imperative that we intensify exploration and production in India, attract investments so that we secure energy supplies, support and create hundreds of thousands of jobs, generate billions in revenue for the industry and government, and as a result stimulate overall economic growth. However, pressures on the sector have grown as prices have continued to fall.
Given the historic low oil prices, numerous governments have facilitated oil & gas companies to sustain exploration and production till global oil & gas market reaches a better equilibrium.
Thus, in addition to the two positive measures announced in the budget, the Union Finance Minister could have utilised his third budget to announce other policy measures which could have further help restore investor confidence.
For instance, I was very hopeful that the Finance Minister will address specific concerns of the industry with respect to the applicability of service tax. Given the low oil prices and the fact that service tax is a cost to the upstream oil & gas industry, the budget could have incentivised exploration in India by exempting service tax.
From an oil & gas industry perspective, I believe, the budget is balanced. I was envisaging measures that could have facilitated existing oil & gas producers to ramp up their production; swiftly bring more production on line and commit higher investments. Thus, it could have taken some additional bold steps with more forward-looking provisions to revitalize the sector. We would continue to work with the government and its institutions to ensure that the necessary investments in the sector are not further hampered.
By Mayank Ashar, CEO, Cairn India